Canadian Retail Markets Study

A Review of Competitiveness in the Canadian Refined Petroleum Marketing Industry
Prepared For: Industry Canada Natural Resources Canada Canadian Petroleum Products Institute

September 15, 1997
Suite 413, 1333 - 8th Street SW Calgary AB T2R 1M6 Canada 403-283-8704

Table of Contents
List of Figures _____________________________________________________ i List of Tables ______________________________________________________ ii Executive Summary _______________________________________________ iii Introduction _______________________________________________________ 1 Background Study Overview Report Format and Conventions Acknowledgments An Overview of the Model Competitiveness: The Pump Price Model in Motion Canada’s Petroleum Industry: Upstream and Downstream Upstream Industry Petroleum Refining Petroleum Marketing Taxation on Petroleum Products Pump Price/Margin Model: An Integrated View Marketing Sector Overview Competitiveness in the Retail Gasoline Sub-Sector Retail Gasoline Demand National Retail Petroleum Outlet Representation Retail Petroleum Outlet Modes Outlet Throughput Ancillary Services Gasoline and the Consumer Price Index Key Price History Margin History Canada vs. US Price History Rack Price History Demand vs. Price History 1 2 2 2 4 5 7 8 9 12 14 16 17 19 23 24 25 28 29 30 31 32 34 35 36

Part A Pump Price/Margin Model ____________________________________ 4

Part B The Structure of the Retail Petroleum Products Sub-Sector ________ 16

Part C Historical Trend Analysis ____________________________________ 30

Part D Selected Markets Study ______________________________________ 38

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Introduction Methodology Study Market Findings Market by Market Competitive Analysis Findings Conclusions Recommendations

38 38 42 52 72 74 80

Part E Findings, Conclusions & Recommendations _____________________ 72

Appendices _______________________________________________________ 82 I Glossary of Terms________________________________________________ 83 II Source Data Tables ______________________________________________ 85 Table A: CPI Index: Selected Goods and Services Table B: Key Price / Margin History - Regular Gasoline Table C: Canadian Supply, Inventory, Demand, and Pump/Rack Prices Table D: Pump Price History - Study Markets Table D: Pump Price History - Study Markets (cont’d) Table E: Ex-tax Pump Price History - Study Markets Table E: Ex-tax Pump Price History - Study Markets (cont’d) Table F: Rack Prices - Study Markets Table F: Rack Prices - Study Markets (cont’d) Table G: Study Market Data - Throughput and Price by Grade Table H: Study Market Data - Rack Price, Tax (by Grade) Table J: Study Market Data - Blended Prices, Costs, Margin Table K: Study Market Data - Sales, Revenue, Outlet Costs, Income Table L: Study Market Data - Demographic Profiles 85 86 88 90 91 92 93 94 95 96 97 98 99 100

III Sources of Information about the Downstream Petroleum Industry____ 101

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.........................................Regional & Urban Groupings.................. Income...................................................................... 33 Figure 13: Monthly Gross Marketing Margins........................List of Figures Figure 1: Pump Price / Margin Model....................................................................... 71 MJ ERVIN & ASSOCIATES i ............................................................8¢ Pump Price) .................... 56 Figure 30: Regina ...................... 25 Figure 7: Outlet Representation by Mode..................................................................................... 54 Figure 29: Calgary ..................................................................................................Selected Centres ........................................................................ 62 Figure 33: Ottawa ..............................Price History .......................................Price History ............................1988-1995 .................... 34 Figure 14: Canada / US Monthly Pump Price (Nominal $) ........... 70 Figure 37: Charlottetown ..................................... 35 Figure 16: Monthly Demand vs................................................. 44 Figure 21: Gross Marketing Margin Elements ........................................ 16 Figure 3: 1996 Average Regular Gasoline Margins (56............................................... 43 Figure 20: Ex-Tax Pump Price Elements ............................ 45 Figure 22: Petroleum Gross Product Margins ..................Selected Goods & Services .......................................... Costs................................................. 29 Figure 9: Annual Gasoline Price (Cents per Litre) ........................... Pump Price (nominal ¢/litre).......................................................................Regular Unleaded ..................................................... 4 Figure 2: 1996 Average Prices/Margins ....... 40 Figure 18: 1995 Average "Blended" Pump Price .............Price History ...... 53 Figure 28: Vancouver ........................................ 24 Figure 6: 1995 Retail Outlets by Province ................................................................................ 66 Figure 35: Saint John NB .............. 36 Figure 17: Study Market Methodology ................................................................. 46 Figure 23: Average Annual Throughput per Outlet............... 18 Figure 4: 1995 Refined Petroleum Products Demand by Product Category....Price History ........................................Price History...................... 28 Figure 8: Outlet Representation by Service .Price History ................................ 49 Figure 26: Outlet Revenues........ 69 Figure 36: Halifax ........................................................................ 58 Figure 32: Toronto ................................................................................................................................................................................ 47 Figure 24: Outlet Volume vs................................ 50 Figure 27: Victoria ................................................................. 31 Figure 11: Monthly Prices 1990-1996 (Nominal $) ............................... 32 Figure 12: Monthly Margins 1991-1996 (Nominal $)...................... 30 Figure 10: CPI Index Comparison ..... 48 Figure 25: Outlet / Volume Relationship ............Price History................................................... 34 Figure 15: Monthly Rack Prices: Selected Markets . 42 Figure 19: Pump Price .............................Price History..............................................................................tax............... 63 Figure 34: Montreal .........................................................................................................Price History.........Price History ....................................................... ex-tax elements .......................... 57 Figure 31: Winnipeg ................................................................. Gross Product Margin ........................................................Price History.................................................. 24 Figure 5: Canadian Retail Outlet Population ...........................................................

........................................List of Tables Table 1: Downstream Sales Channels ......................................................................................................... 15 Table 3: Selected Study Markets ...................... 1996 .................................................. 39 Table 4: Estimated Cash Flow from Consolidated Net Revenue..................................... 13 Table 2: Taxes on Regular Gasoline on December 31......... 51 MJ ERVIN & ASSOCIATES ii ....

dealer income. These prices are determined in a competitive marketplace. and a foundation for effective policy development. Pump Price/Margin Model The study presents a model which serves to illustrate the interrelationships between the many stakeholders who ultimately receive the revenue from the sale of a litre of gasoline. the Canadian retail marketing sector realized an average gross product margin of 3. This Retail Petroleum Markets study provides a practical tool for understanding the dynamics of this vital and complex industry. The model also illustrates that each sector margin is defined by the price at which feedstock or wholesale product is bought and then sold. 1996 Average Prices and Margins .1 ¢ 5. each with unique MJ ERVIN & ASSOCIATES iii .4 ¢ 19. represented by crude. This study. together with a separate review of the refining sector. supplier costs and profitability.Executive Summary Study Objectives The Canadian Retail Petroleum Markets Study is a joint initiative of Industry Canada. rack.6 ¢ EX-TAX PUMP PRICE RACK PRICE DOWNSTREAM MARGIN MARKETING MARGIN REFINER MARGIN UPSTREAM PRODUCT MARGIN FREIGHT 3. Price competition occurs at three distinct levels in this industry. This margin represents gross income (after wholesale product cost and freight costs) available to provide for retail marketing operations including outlet costs.3 ¢ 28.5 cents per litre on the sale of regular gasoline in a typical major urban market. and the Canadian Petroleum Products Institute (CPPI). forms a comprehensive overview of the competitiveness of the downstream petroleum industry in Canada.Regular Gasoline 10 City Average NOT TO SCALE PUMP PRICE 56.2 ¢ 24. and ex-tax pump prices.8 ¢ TAX 28. Natural Resources Canada (NRCan).3 ¢ CRUDE PRICE source: Natural Resources Canada The model shows that in 1996.5 ¢ 0.

this study focuses on the retail gasoline sector. are examples of ways in which outlet petroleum sales are augmented by other revenues. demand and other competitive factors existing at the time. Dealers have a variety of relationships with their supplier. due to its prominence in the public and media domain. From 1986 to 1995. Approximately 16.500 retail outlets were in operation in Canada in 1995. well over half of all outlets in Canada operate as lessees or independents.000 in 1989. car wash. nine of the past ten years. The Structure of the Retail Petroleum Products Industry Retail petroleum marketing is typified by the retail “gas station” outlet. the responsibility for deciding upon retail pump prices resides principally at the local dealer level. and accordingly.dynamics. ex-tax pump prices declined by 4 cents per litre measured in nominal dollars. encompassing several marketing channels which provide a range of petroleum products to industrial and domestic consumers. The Canadian retail gasoline marketing sector is but one element of a much larger industry infrastructure. While each of these marketing channels operates in a competitive environment. and declined by 10 cents per litre measured in constant dollars. Convenience store. compared to about 22. Historical Trends Changes in the average gasoline prices in Canada have remained at or below the “All Items” Consumer Price Index (CPI). and the traditional automotive service bay. which potentially allow for reduced margins at the gasoline pump. Annual Gasoline Price in Cents per Litre 60¢ Nominal 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Source: NRCan 15¢ 1986 1987 1988 Including Tax Constant $ Excluding Tax Nominal Constant $ 1989 1990 1991 1992 1993 1994 1995 Source: Natural Resources Canada (Nominal $). The resultant margins are therefore a reflection of the state of product supply. Ancillary or non-petroleum revenue is an increasingly important feature of the retail gasoline marketing industry. Statistics Canada (Constant $) MJ ERVIN & ASSOCIATES iv .

Canadian average ex-tax pump prices in major markets have been virtually identical to those of the United States since mid-1994. however. while (average) combined gross refiner and gross marketing margins decreased by about 7 cents per litre.The “tax-included” nominal pump price increased over this same period. MJ ERVIN & ASSOCIATES v . the average tax content of regular gasoline pump prices in major Canadian cities increased by about 5 cents per litre. As a result of these trends. both refiners and marketers have experienced a decline in margins as a result of price competition at the rack and at the retail pump.rack) Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Apr-91 Oct-91 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96 0¢ source: Natural Resources Canada Despite an upwards trend in world crude prices since 1991. This has both resulted in. and emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. improved retail outlet sales performance as a consequence of retail outlet rationalizations and demand increases. Regular Gasoline Downstream (Marketing + Refiner) Margin 15¢ 10¢ Refiner Margin (rack . Monthly Margins in Nominal Cents per Litre 30¢ Tax Content 25¢ 20¢ Canada Avg. From 1991 to 1996. and has been a result of several factors including: • • • improved refinery utilization and efficiency.crude) 5¢ Marketing Margin (retail . as a consequence of refinery plant rationalization (closures) and a modest demand increase.

This provided for market-bymarket and regional comparisons of key competitiveness indicators. 19 markets representing a broad range of conditions. When petroleum gross product margins were compared to their corresponding outlet throughputs. MJ ERVIN & ASSOCIATES vi . in order to identify market and/or regional competitive differences as potential issues or opportunities within the industry. although this study provides an independent confirmation of this. from 3 cents per litre in Toronto to 14 cents per litre in Gaspé. With few exceptions. were selected for a detailed review of outlet economics.Comparison of Canada. rural markets. A wide range of petroleum gross product margins were evident. to derive 1995 average petroleum gross product margins for each of the 19 markets. which led to two key findings: • Larger population centres and their surrounding communities consistently exhibited lower pump prices and narrower gross product margins than smaller. That such a relationship should exist was not surprising. wholesale product cost and freight charges) were isolated from the pump price. This was integrated with selected NRCan price data. but also had significantly higher throughputs per outlet. several “outside variables” (product taxes. US Monthly Pump Prices 65¢ 60¢ 55¢ 50¢ Price per litre 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Apr-93 Oct-93 Jan-93 Jan-94 Jul-93 US Pump Price (Cdn ¢/l) Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-95 Jan-96 Oct-96 Jul-94 Jul-95 Jul-96 Excluding tax Canada Pump Price US Pump Price (Cdn ¢/l) Including tax Canada Pump Price source: Natural Resources Canada Selected Markets Study As part of this study. With the participation of several CPPI member companies. the 19 study markets exhibited a high degree of correlation in gross product margin as a function of outlet throughput. a distinct pattern was demonstrated: an inverse relationship between retail gross product margin and the average outlet throughput associated with that market. and one by one. proprietary 1995 operating data were collected on a total of 481 retail outlets in the selected market groups.

and the higher prices (and margins) generally seen in these markets were a function of poor volume performance.000. head office and regional office overheads. an additional goal of this study was to undertake a comparison of outlet profitabilities. and his personal labour investment.• Smaller markets performed as competitively as larger centres..000 Volume (litres) 4.000 2. These costs would include salaries of marketing representatives and management.000 3.962 R2 = 0. car wash) and outlet costs were factored into the market study analysis to derive a complete measure of average outlet income (in absolute dollars) in each region.6634Ln(x) + 76.000. sales processing.000. of which gross product margin and throughput are only two of several factors.6624 1. this study estimated that within the 19- MJ ERVIN & ASSOCIATES vii . supplier profit: after the above costs are allocated.000 6. not poor competition. smaller markets. Relationship of Gross Product Margin to Outlet Throughput (1995) 18¢ Peace River Thompson Chicoutimi Saint John Charlottetown Gaspé 16¢ Victoria Vancouver White Rock Calgary Regina Winnipeg Ottawa Sault Ste Marie 14¢ 12¢ Sioux Lookout 10¢ 8¢ 6¢ Nanton 4¢ Toronto 2¢ y = -4.000 Halifax Montreal 0¢ source: MJ Ervin & Associates Although a comparison of petroleum gross product margins to their corresponding throughputs was shown to be an effective competitiveness analysis tool.000. • Using market-determined rack prices as the basis for establishing petroleum gross product margin and its related revenue. the residual revenue is available as profit to be re-invested into retail operations. corporate charity. and in major vs. which reflects his investment in the outlet.000. brand advertising. Consequently.000. This study showed that an average outlet net revenue in the 19-market study group was about $70. revenues from ancillary operations (eg: convenience store. which represents the source of cash flow for three distinct purposes: • • dealer income/profit: the return or salary to the dealer. supplier overhead: all operating costs of the supplier that are not directly associated with a single outlet. etc. and/or distributed to shareholders.000.000 5.

000 $50. 1. at 1995 prices.000 $100. was shown to be strongly competitive: MJ ERVIN & ASSOCIATES viii . were insufficient to cover outlet costs.000 per year. but that outlets in smaller (Group B) markets had higher outlet incomes than major (Group A) market outlets .$154. suppliers likely incurred a net loss on outlet operations in 1995. Conclusions The study findings lead to a number of conclusions relating to the competitiveness of Canada’s petroleum marketing sector. it was likely due to profitability in the refiner side of operations in the case of integrated refiner/marketers. Although an objective measure of competitiveness is elusive.000) $(350. or due to lower nonoutlet overhead costs which are likely achievable by regional and independent marketers.000) 1: Net Retail Petroleum Revenue 2: Ancillary Revenue 3: Outlet Costs 4: 95 Consolidated Retail Outlet Income source: MJ Ervin & Associates The study also showed that very little fundamental difference in outlet profitability existed between regions. by all objective measures available to this study.000) $(200.000 vs. Where the actual corporate results of petroleum marketers showed 1995 profits from their downstream operations.000 $150. Average Outlet Income (before marketing overhead costs) BC/PR $300.market study group. Despite this difference. and that petroleum sales revenues alone.000) $(100.000) $(300. for which this study had no specific data. The study showed that the average urban outlet would experience a net loss without the contribution of ancillary operations. after allowing for estimated dealer profit and supplier overhead.000 $200.000 $($80) ON QU/AT Group A Group B All Study Mkts $(50. a variety of available data suggests that a state of vigorous competition exists in the Canadian petroleum marketing sector. distant outlets are clearly higher than those associated with concentrated urban markets. respectively. $61. rural market outlets were likely to be no more profitable: supplier overhead costs associated with maintaining rural.000 $250.000) $(150. The Canadian retail petroleum products industry.000) $(250.

A long-term decline in pump prices, when measured in constant and nominal dollars, was observed (Finding 10). This has not simply been a result of a decline in underlying raw materials costs; the very margins within which this industry operates has, over the long term, exhibited a diminishing trend (Finding 13). On a national level, in comparing Canada average (city) pump prices to those of the United States, Canadian prices have been at or below US prices in recent years, when taxes were excluded (Finding 14). In comparing several diverse markets, a consistent pattern of competitiveness emerged when comparing product margins to their associated average outlet throughputs (Finding 18).

These findings are likely in sharp contrast to a common public perception of this industry in general and price trends in particular. Virtually all of the competitiveness indicators examined in this study relate to price. As described in this study however, price is but one of four competitiveness “tools” available to marketers (product, place, and promotions are the other three). Closer examination of these strategic tools might yield additional insights into the nature of competition in this industry sector.

2. The economic relationship of the petroleum marketing sector with its related stakeholders is a complex one.
Critical to the overall success of this study was the development of a model which would create a common frame of reference for the considerable terminology that accompanies an industry as complex as Canada’s petroleum sector. The study presents such a model, which also serves to illustrate the interrelationships between the various stakeholders who ultimately receive the revenue from the sale of a litre of gasoline. This price/margin model illustrates that the various sector margins are a consequence of the prices at which feedstock or wholesale product is bought and then sold (Finding 1). The contrary notion that a given refiner or marketer is free to establish a price based upon a minimum margin requirement, is mistaken. Rack and pump prices are determined in competitive marketplaces, each with unique dynamics. The resultant margins, which at times can decline to very low or even negative values, are thus a reflection of the state of product supply, demand and other competitive factors existing at the time. In applying such a model to the retail petroleum marketing industry, it is important to understand that, while crude oil markets are considered global in scope and rack product markets are considered regional in scope, retail petroleum markets are considered local (municipal) in scope, since this is the effective range of consumer choice. This implies that the competitive dynamics pertaining to these retail markets can, and do, vary considerably from one population centre to another. Dealers were shown to have a variety of relationships with their supplier; well over half of all outlets in Canada operate as lessees or independents, and accordingly, the responsibility for deciding upon retail pump prices was shown to reside principally at the local dealer level (Finding 9).

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While some markets, particularly smaller ones, experienced higher than average pump prices, when the “outside” factors (tax, rack price and freight cost, for example) were rationalized, the resultant margins were found to display a distinct relationship with average outlet throughputs for each market. A much more accurate barometer of industry competitiveness would therefore be the rack-to-retail or gross product margin, measured against the average outlet throughput for that market. This would entail the tracking of not only pump price, but also rack prices and outlet performance, an exercise that consumers are unlikely to engage in, but not beyond the reach of any organization wishing to truly understand petroleum competitiveness issues.

3. Taxation is a significant factor in the price of retail gasoline, and in some markets, presents a competitive disadvantage to Canadian marketers.
This study’s analysis of NRCan urban regular gasoline prices shows that the tax content in a typical consumer’s gasoline purchase is about 50 percent (Finding 4). By contrast, crude costs accounted for roughly 34 percent (Finding 2), refiner margins accounted for 5.3 cents or 9 percent (Finding 5), and product margins accounted for 3.5 cents, or 6 percent (Finding 6) of the 1996 average regular pump price. Petroleum product taxes are levied at the federal, provincial, and in some markets, municipal levels of government. The latter two can vary considerably from one market to another, and are a predominant cause of inter-regional pump price differences (Finding 16). The measurement and analysis of the effect of petroleum taxation levels in Canada compared to other countries is well beyond the scope of this study, but given its magnitude, taxation as an element of public policy is an area worthy of additional research. Due to the localized nature of competition in the retail gasoline marketing sector, taxation differences between Canadian and US markets, or even between Canadian markets with differing tax structures, generally do not serve as competitiveness inhibitors. The demonstrated exception to this is in markets directly adjacent to nearby US markets, but even in such cases, these markets have managed to sustain a certain level of viability and competitiveness. Canadians nevertheless enjoy one of the lowest average gasoline taxes in the industrialized world, second only to the United States.

4. Pump price fluctuations can be an indicator of competition in the marketplace.
Demand for gasoline was shown to vary significantly according to the time of year, in a highly distinct, predictable seasonal pattern. Retail pump prices showed a corresponding seasonal pattern, reflecting consumer demand behavior (Finding 15). This relationship between price and demand was cited as the essence of competitiveness in the petroleum rack marketplace, which in turn is the principal

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driver of ex-tax pump prices. Viewed from this perspective, fluctuating prices are a strong competitiveness indicator (Finding 7). Retail pump price changes showed a close relationship to underlying rack prices, which in turn, showed a close relationship to underlying crude prices (Finding 11). Rack prices were shown to not significantly differ between major centres, further suggesting that a strongly competitive environment exists in the refiner sector as well (Finding 3). While price wars are undoubtedly an indicator of competitiveness, the absence of price war activity does not imply a lack of competitiveness. This study’s marginvolume model could detect no difference between price-volatile markets such as Toronto, and more price-stable markets such as Sioux Lookout, on the basis of price fluctuation alone. In fact, Sioux Lookout, a price-stable market, exhibited competitive traits typical of any of the study markets, when examined on the margin-volume model.

5. Retail gasoline marketing revenues, on a per litre basis, constitute a small portion of the retail pump price.
The pump price/margin model shows that in 1996, the Canadian retail marketing sector realized an average gross margin of 3.5 cents per litre on the sale of regular gasoline in a typical major urban market (Finding 6). This margin represents gross revenue (after wholesale product and freight cost) which, incorporated with ancillary revenues and outlet costs, is available to provide for all retail marketing operations including outlet costs, dealer income, supplier costs and profitability. This consolidated outlet revenue, when distributed these three ways (Finding 20), translates into supplier profits of an estimated one cent per litre of petroleum sales in the case of smaller markets, and a loss in the case of urban markets, which represent the majority of Canada’s population base. While these findings are somewhat qualified in terms of this study’s use of posted rack prices as the derivation basis, it can still be concluded that the petroleum marketing sector constitutes a small portion of the total retail pump revenue distribution.

6. Declining refiner and marketing margins, have caused, and have resulted from, intense competitive pressures in the downstream industry in general, and the marketing sector in particular.
Changing conditions in Canada’s downstream petroleum sector have caused retail pump prices to remain relatively flat since 1992, despite increases in tax content and crude costs (Finding 12), both of which are beyond the direct influence of Canada’s oil companies. A truly objective barometer of downstream industry influence on retail pump price lies in the measurement of margin, not price. Since 1991, the combined downstream (refiner and marketing) margin in Canada decreased by about 7 cents per litre (Finding 13). This trend has both resulted in, and has been a result of, several competitive strategies, including:

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in the long term these fluctuations are likely more reflective of market restorations. 7. crude costs. regardless of size. Annual residual profits available to petroleum marketers is in the order of perhaps one cent per litre. Also. the rack price basis used in this study may understate actual revenues by about 1 to 2 cents per litre. virtually all of the 19 study markets exhibited similar levels of competition. 8. When these margins were compared to their corresponding outlet throughputs. this industry sector would have realized profits of unprecedented proportions. Industry profitability is extremely sensitive to very small changes in pump price. Both the downward trend in margins. Thus. and in turn. these findings clearly show that pump price increases are ultimately linked not to increased profits. It is likely that regional and non-refiner marketers operate with somewhat smaller overhead costs than those used in this study. although pump prices in some markets can fluctuate by several cents per litre in the course of a week. emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. Thus. pump price signs are particularly ineffective as a barometer of petroleum marketer competitiveness and profitability. but to increases in underlying rack prices. profit margins in this sector can be stated to be in the order of 1 to 2 cents per litre in a “good” year. from 3 cents per litre in Toronto to 14 cents per litre in Gaspé.• • • improving production efficiency through refinery plant rationalizations (closures). That such a relationship should exist was not surprising. most outlets used in the 19-market study represent major integrated oil companies. Outlet throughput is a key determinant of inter-market pump price differences. had petroleum margins which were commensurate with average outlet throughput for that market. not excessive profits. When plotted against the margin-volume model. based upon an assumed posted rack price. and the associated industry initiatives which are ongoing in nature. Thus. serve as perhaps the most significant indicators of competitiveness in the downstream industry. A wide range of petroleum gross product margins were evident within the 19market study group. although this study provides comprehensive evidence of this. Although some smaller markets appeared to have higher gross MJ ERVIN & ASSOCIATES xii . if Canadian average pump prices were only one cent higher than they were in 1995. improving retail outlet performance through outlet rationalizations (closures) resulting in higher unit throughputs (sales volumes). Indeed. Nevertheless. most markets. a distinct pattern emerged: an inverse relationship between retail gross product margin and the average outlet throughput associated with that market (Finding 18). assuming all other costs were unchanged. While these economics might appear to place this industry in a position of poor viability. Also. despite the predisposition of many observers to use them as such.

more isolated markets are generally higher than in larger centres. This created some economic pressure to sell product at a higher pump price. in order to build upon the findings in this study towards a full understanding of the dynamics at work. reduce pump prices. there are three points to consider: • • In very small markets. likely due to the different geographic and lifestyle differences that exist in small communities compared to major cities. The loss of employment represented by a station closure may be of some concern to smaller communities. according to the margin-volume model. it would seem that if local government in smaller markets were interested in lowering pump prices. average pump prices were relatively high.product margins than larger markets. • The particular competitiveness and viability issues facing smaller markets is an issue worthy of further study. Some impediments to market exit may exist in the form of petroleum underground storage tank regulations which may present to the operator the option of pumping gas as the better alternative to decommissioning the site and possibly incurring prohibitive remediation costs. isolated markets face particular challenges: although found to be highly competitive. and this study showed that gasoline prices were no exception. and therefore suffered an additional distribution cost disadvantage of about 2 cents per litre on average (Finding 17). While competitiveness in most smaller markets was shown to be as active as in larger centres. A full-serve retail gasoline outlet typically employs 3-5 staff. poor outlet throughputs were generally the predominant factor. thereby improving petroleum volumes and ancillary revenues at the remaining sites. Smaller. other factors exist which contribute to relatively high margins and prices. High distribution costs Smaller markets are generally further removed from their source rack point than larger centres. This was due to three factors: • Low average outlet throughputs The average group B outlet sold approximately 1. • • At first glance. Low ancillary revenues Outlets in smaller centres received significantly less ancillary revenue than their group A counterparts. which should. MJ ERVIN & ASSOCIATES xiii . in order to generate sufficient revenue to cover the outlet’s fixed operating costs. reducing the number of outlets may also reduce the number of competitors. The costs of most consumer goods in smaller. In suggesting this approach however. 9. which could actually inhibit competition. the solution would be to encourage some dealers to exit the market.5 million fewer litres of gasoline than a group A (major centre) station.

is both the cause and consequence of increased activity in ancillary operations. 11. The 19-market study provides some insights into the issue of whether or not regulated retail gasoline markets serve to benefit consumers (Finding 22). and in turn. Retail ancillary operations are a critical element of petroleum price competition. Convenience store. This study proposes rather. The federal Competition Bureau for example. and as such. Ancillary or non-petroleum revenue is described as an increasingly important feature of the retail gasoline marketing demography (Finding 19). As these findings show.10. has seen a decline in pump prices relative to other Canadian markets. Recommendations This study advances two recommendations to enhance the existing competitiveness in Canada’s petroleum marketing sector. is viewed as an agency which exists to the benefit of industry and consumer alike. were cited as examples of ways in which outlet petroleum sales are augmented by other revenues. This competition then. the degree of price competition in the retail petroleum has in effect. sometimes below that of outlet operating costs. car wash. Non-petroleum revenues at retail gasoline outlets will continue to gain prominence. that where a healthy competitive climate exists. as marketers find even more innovative ways to attract market share. as it does in the Canadian petroleum marketing sector. will likely preserve a highly competitive petroleum market. Also. Government intervention into petroleum marketing is likely a poor alternative to market-based regulation. direct regulatory interventions may have an adverse effect on competitiveness. characterized by narrow product margins and relatively flat pump prices. MJ ERVIN & ASSOCIATES xiv . and the perceived effect on their markets. Charlottetown. and the traditional automotive service bay. This is not to say that all direct government intervention into marketing practices is certain to produce undesirable results. This will be driven by the depressed petroleum product margins which currently exist in the petroleum marketing sector. A full analysis of the various features of the Nova Scotia and PEI regulatory structures. depressed petroleum revenues. The historical record is clear however: since deregulating pump prices. under the current PEI regulatory structure. the Halifax market. is well beyond the scope of this study. many national and local environmental regulations exist for good cause. possibly to the detriment of the consumer. and likely others in Nova Scotia. does not appear to benefit in consumer terms. are an acceptable limitation on pure competition (Finding 8).

This study might be used as the concept basis for a comprehensive annual update of price/margin trends and selected market competitiveness research. Individual companies within the retail petroleum industry have been reluctant to speak directly to the issue of gasoline pricing and competitiveness. Improve public understanding and awareness of competition in the petroleum marketing sector. • • Would this enhance the competitiveness of this sector? It is felt that better public understanding of this industry’s record of competitiveness. along the lines of the model used in this study. Ways in which this gap can be closed might include: • Ongoing third party evaluation of prices. in a simple format designed for consumers and legislators. Research into the specific competitiveness issues of concern to consumers would provide valuable direction for groups conducting industry competitiveness research. • • MJ ERVIN & ASSOCIATES xv . using Canadian and foreign selected markets. Public perception measurement. would ultimately be reflected in carefully-considered public policy which serves to truly enhance. This study alludes to several potential study initiatives which go well beyond the objective of public awareness and may assist both the public and private sector policy and strategic directions: • Price/Margin Modelling: Development and adoption of a standard price model and associated terminology by industry/government. Develop cooperative industry research into marketing sector competitiveness issues.1. Regulatory Intervention: Historical and theoretical research into government regulation of petroleum markets. Marketing Strategy Effectiveness: Research into price and non-price marketing strategies and their relative influence on consumer response. A regular comprehensive competitiveness evaluation. using Canadian and foreign selected markets. Organizations such as the Canadian Petroleum Products Institute and the Petroleum Communication Foundation would therefore have an expanded role to play in commissioning and regularly disseminating the results of these recommended initiatives. Industry and government have an opportunity to continue to work together in cooperative research similar to that which this study represents. A recurrent theme arising from this study’s conclusions is the likely gap that exists between the demonstrably high level of competition within this industry sector. This should be in the form of a quarterly summary of price trends and related measurements. and the nature of competitiveness influences. and the converse image held in much of the public domain. not inhibit. margins and competitiveness factors. petroleum marketing competitiveness. 2.

MJ ERVIN & ASSOCIATES xvi . Lack of understanding of this industry can lead to misguided policies which benefit neither the industry nor the consumer. consumers. and regulators alike. the possible effect of underground storage tank legislation as a potential impediment to market exit and as a competitiveness inhibitor. is vital if Canadians are to put in place the structures that truly meet their social and economic needs. using Canadian and foreign selected markets. and issues/opportunities facing such markets. and in particular.• Small Market Competitiveness: Detailed research into small market outlet economics and competitiveness. A better comprehension of the true issues and opportunities facing this industry would be an important step in the right direction towards stable and effective policy. by industry. • * * * Better understanding of this industry. Taxation: An analysis of taxation levels on industry and consumer behavior and as a tool of policy and revenue.

leading to more effective policies and reduced uncertainty for future investment.to provide a sound database upon which more effective policy decisions can be made. including a regional. and regional differences which face the petroleum products retail industry.to analyze the rack to retail market and the market structure for refined petroleum products.. Project Objectives The working group established as the primary objective of this study “.... or even communities within the same region.. region by region across Canada. and in the process.. and .. Industry Canada completed a Sector Competitiveness Framework (SCF) for the Canadian refined petroleum products (downstream) industry. Specific purposes of this study would be: • • • • “.. more detailed economic model of the industry from the rack price point (eg: the refinery plant) to the retail pump. or petroleum marketing portion of the study. the Canadian Petroleum Products Institute (CPPI). and in comparison to the Canadian national average and nearby USA markets”. to name a few. competitive pressures from US and offshore refiners.to determine the key factors which drive competitiveness in specific markets.to draw comparisons with nearby USA markets. The SCF laid the foundation for supplementary studies.” An additional study objective was that an assessment of the viability and competitiveness of regional markets be made. This would have several advantages: it would objectively explain the sometimes significant pump price differences that can exist between regions. provide a model for better understanding the nature of competition and pricing economics within the petroleum marketing sector. and that issues and challenges be identified so that conclusions and recommendations can be made “. and MJ Ervin & Associates was selected to undertake the “rack to retail”.. . and Industry Canada was convened to undertake this project.. . face a number of challenges: a poor public image. and a challenging array of potential environmental initiatives. which comprise the “downstream” oil industry. The objective of this project was to improve understanding of the issues affecting the long term competitiveness of this industry.to help the industry cope and to enhance competitiveness.Introduction Background Canada’s petroleum refining and marketing sectors..to better understand the competitive opportunities and challenges. In 1995.” MJ ERVIN & ASSOCIATES 1 .. A working group represented by Natural Resources Canada (NRCan).

• Part E: Conclusions and Recommendations summarizes the study findings and. Findings are stated in bold and are summarized in part E of this report. from which some important findings are made. or which have a specific meaning in the context of this report. and in order to provide insights into the range of competitive dynamics that can exist. undertaken as part of this project to: • make a more detailed examination of price. through a multi-faceted approach. presents conclusions and recommendations which arise from the study findings. Ultimately. and the effect of competitiveness on each subsector. Part D: Selected Market Study presents the findings of a diverse 19-market study. and a foundation for effective policy development. Part C: Historical Trend Analysis provides an overview of prices. Supporting data to these charts can be found in Appendix II. Study Overview This study is in five parts: Part A: Pump Price/margin Model presents a conceptual model for understanding the interrelationship between various subsectors of the petroleum industry. in Appendix I. Acknowledgments Three organizations were of considerable assistance in the development of this study: MJ ERVIN & ASSOCIATES 2 . Part B: Retail Structure serves to provide a general overview of the retail gasoline sub-sector in terms of infrastructure. margins and related implications for market competitiveness than can simply be provided by existing public-domain data. all prices and margins referred to in this document are stated in nominal Canadian dollars or cents (ie: not adjusted for inflation). The study does provide comparisons with US markets on a national level of detail. Specific comparisons of specific Canadian and US consumer markets were not made. It also relates consumer demand patterns to pump price fluctuations. Report Format and Conventions • • • • We have defined terms which may be unfamiliar to the reader. Unless otherwise stated. Many of the findings in this report are presented in graphical form.The study meets these objectives. an examination of a diverse array of markets in order to determine the degree of dissimilarity or similarity between them. margins and demand patterns over the past several years. due to the considerable data gathering difficulties that such an approach would entail. it provides a comprehensive tool to understand the dynamics of this vital and complex industry.

Finally..• Industry Canada.. Environment Canada. Consumers Association of Canada. several companies made a significant contribution by providing us with retail outlet operating data used in the selected market study.. facilitated some of the data gathering needs of this study. and provided critical guidance and feedback at several key stages in the process. assisted in securing the support and participation of member companies in the selected markets phase of the study. Petro-Canada. The Canadian Petroleum Products Institute. Suncor Inc. and also participated in the steering committee. through the involvement of Cindy Christopher and Jack Belletrutti (now with CPPI). and Shell Canada. MJ ERVIN & ASSOCIATES 3 . for their assistance. Natural Resources Canada. and their 481 retail associates whose outlet data was used in our analysis. We gratefully acknowledge these companies. • • Several organizations participated in two key review sessions. and Industry Canada. Suncor Inc. through Maureen Monaghan and Huguette Montcalm.. Shell Canada. These included: Canadian Tire Petroleum. Ontario Ministry of Environment and Energy. NRCan. chaired the steering committee. Ministère des ressources naturelles du Québec. Imperial Oil Ltd. Petro-Canada. CPPI. through Bob Clapp. including Ultramar Canada.

principally of motor gasoline. And. An Overview of the Model Figure 1: Pump Price / Margin Model NOT TO SCALE PUMP PRICE TAX DOWNSTREAM MARGIN MARKETING MARGIN REFINER MARGIN UPSTREAM PRODUCT MARGIN FREIGHT EX-TAX PUMP PRICE RACK PRICE CRUDE PRICE MJ ERVIN & ASSOCIATES 4 . unlike many consumer products. or taste. These relationships can be modeled. the particular quality of gasoline which is of most interest to consumers is not its colour. This price/margin model thus creates a common reference for understanding the economics of retail gasoline. public attention towards the competitiveness of this industry is most focused during a time of gasoline pump price increases. texture. its price. but simply. In fact.price . as this study shows. as they are in Figure 1. Yet. The interface between each of the stakeholders in this model is defined primarily in terms of the price at which product is transferred (sold and then bought) from one sector of the industry to its neighboring sector. most Canadians relate to this industry in one specific way: as consumers. It is this particular feature of petroleum products . multifaceted industry. To understand competitiveness and pump price economics in the Canadian retail gasoline sector requires a clear understanding of the interrelationships between the principal stakeholders who ultimately share the revenue from the sale of a litre of gasoline.Part A Pump Price/Margin Model Although Canada’s petroleum industry is a vast. pump price changes as displayed on the street sign provide no real insights into the factors which drive competitiveness in this industry.which is used by many groups and individuals to assess the competitiveness of the petroleum industry. and serves to explain several factors that together determine retail gasoline prices at any given time.

From an industry perspective. gross margin represents revenue only. This section represents the basic model of pump prices and margins shown in Figure 1 not as a fixed view of what pump prices and margins “should be”.from the total pump revenue. Competitiveness: The Pump Price Model in Motion EX-TAX PUMP PRICE RACK PRICE CRUDE PRICE One of the key questions this study seeks to answer is “Is the gasoline marketing (ie: rack to retail) sector truly competitive?” As there is no standard.Many of the terms introduced and explained in this section are used extensively throughout this study. A consumer however. each essentially taking a share1 . evaluating competitiveness is therefore a partly subjective process. typically the retail price (the price at which the product is sold) less the wholesale price (the price a marketer pays for a product). objective measurement for competitiveness. it is important to define the term “margin”. (implying that the stated margin represents net income or “profit”). these stakeholder revenues are derived from the revenue from the retail sale. Gross margin is simply the difference between two price points. MJ ERVIN & ASSOCIATES 5 . “competitive” may be synonymous with “viable”. this study examines competitiveness from the latter. While both perspectives are valid. Each margin is quantified by its defining prices. While this term is often associated with the phrase “profit margin”. but as a dynamic model in constant motion: as competitive forces act to move various price points up and down. is more likely to equate the term with “value for money”. any operating expenses must then be considered before making any determination of profits. margins are squeezed or expanded accordingly.or margin . A General Definition of Competitiveness Since understanding and measuring downstream industry competitiveness is a general goal of this study. The revenue from the consumer purchase of a petroleum product (such as gasoline) is split among four key sectors. this study’s use of the term relates to gross margin. So defined. 1 The revenue from a petroleum sale filters down to the principal stakeholders in various ways. and in fact inextricably related. Before examining each of the model elements. consumer perspective. Ultimately however. an understanding of the term itself is necessary.

in order to maintain some level of brand variety. the degree of competition within a market.. is the only real option in the long term. as competitors seek to attract market share through lower prices. Price competition. This study therefore attempts simply to identify and illustrate competitiveness indicators which together. such actions by rivals continuously pressure a firm to lower its costs in order that the highest prices the market will permit it to charge enable it to earn a sufficient return of investment to attract investors. or in other words. it can frustrate communication and obscure analysis. the result of price competition is reduced profit. Accordingly. and unless care is taken to use the word precisely. improving efficiencies. This market condition requires that competitors consciously seek to attract business away from each other by price and other means and in turn. In competitive markets the prices of the various competitors inevitably tend toward the same levels because all available cost-savings techniques will be adopted by all the (surviving) competitors. More importantly. competitors can either restore higher prices or reduce costs.Competition means therefore an effective functioning of markets which promotes and requires rivalry amongst competitors for the business of consumers.. Conditions for a competitive market can be deemed to exist when: • • more than one. A useful explanation of competition in the petroleum marketplace was advanced by the Restrictive Trade Practices Commission report “Competition in the Canadian Petroleum Industry” in May. one must ask how marketers compete. Competition can only be sustained therefore.” Price Competition in the Oil Industry In order to assess competitiveness. Since a competitive market effectively limits the price option. provide some means for comparing the type and to some extent.” “. competitive activity can be observed when a competitor alters one or more of MJ ERVIN & ASSOCIATES 6 . a universally acceptable definition of competitiveness is elusive.Unlike many business or economic concepts. in the sense in which it is something in the public interest. They are sources of creative destruction by which monopolies or inefficiencies are destroyed and new entrants and greater efficiency are encouraged. The actions by business rivals place an upper limit on the prices a firm can charge for its products. represents a process by which prices are set. Inevitably. and the entry of new competitors and new ideas. and ideally many entities offer the same or similar products (brand variety). and at least one of the competitors wishes to improve its revenue by gaining a larger share of the market (profit motive). To achieve this. any attempt at arriving at an objective measurement of competitiveness would be subject to considerable debate. Technological change and innovation are the large levers of competition in industry. this usually requires a reasonable number of competitors. if market conditions allow a sufficient number of players to remain profitably engaged. 1986: “Competition may mean very different things to different people. reducing costs. An effective functioning of markets also permits smaller competitors to expand if they meet the test. Simply put.

While those who reside in oil producing regions such as Alberta often think of the oil industry in terms of crude oil and natural gas exploration and production. where petroleum refiners compete on a continental scale to sell refined petroleum products (eg: gasoline) to retail marketing organizations. and Promotion. Irving. whose main 1 E. competition acts to self-regulate prices in three distinct marketplaces2: • • in crude oil markets. Ill. Place. 1960) 2 Although distinct. and a comprehensive description of retail price competition follows: Canada’s Petroleum Industry: Upstream and Downstream The “oil industry” can mean many things to many people. and the downstream industry. Basic Marketing: A Managerial Approach. New York. Price. Within the broad context of the oil industry. where upstream oil producers compete on a global scale to sell crude oil to petroleum refiners. The dynamics of upstream and refiner competition are major studies in themselves. In fact. some organizations have operations in two or more of these markets.the variables at their disposal. in turn determined by competition on a continental (Rack Price) or a local (retail pump price) scale. in rack markets. (Homewood. and in retail markets. It is also important to stress that the market ultimately sets rack and retail pump prices.: Richard D. commonly known as the “marketing mix”1. • Thus described. MJ ERVIN & ASSOCIATES 7 . the raw material from which gasoline is made. A refiner in Toronto may well compete with a refiner in Buffalo. or four P’s: Product. the geographic scale of competition is an important consideration. and are beyond the scope of this study. whose main activity is the exploration and development of crude oil. Given the commodity nature of petroleum products. particularly in the crude (upstream) industry and refiner sector. the most effective of these as a competitive tool is price.. which in turn defines the margins.44 (1st Dec. most Canadians relate more in terms of retail gasoline marketing. where retail gasoline dealers compete on a local scale to sell gasoline to the motorist. and are generally known as integrated oil companies. so a brief description of these. The converse notion that the industry establishes a “should be” margin. 1971). the “oil industry” consists of two distinct industries: the upstream industry. which in turn defines a proper market price. which focuses more on the infrastructure and mechanisms which promote or inhibit competitiveness at the retail level. Jerome McCarthy. 4th Ed. p. and as will become more evident in this study. is false. Nevertheless. competition in the crude and rack markets deserves some mention. Finding 1: Refiner and Marketing Margins are a consequence of their defining prices. but a retail dealer in Toronto is more concerned with the competitive threat posed by other dealers within perhaps a 1 to 2 kilometer radius.

it is important to examine its relationship with its neighboring downstream industry. It is difficult to precisely quantify the upstream “content” in the price of a litre of gasoline. alongside major producing countries such as Saudi Arabia. as a minor contributor to the world crude supply. gasoline grade. Although this industry is not the focus of this study. Canadian producers have virtually no influence over world crude prices. Competitiveness in Crude Markets The nature or extent of price competition in the crude oil marketplace is a subject of considerable debate. consequently. and transportation of crude oil to the refinery plant. drilling. The upstream industry’s crude price is represented in Figure 1 as elastic. and refinery production methods. that is to say.activity is the refining of crude oil into petroleum products. implying that it fluctuates. it is probably sufficient to say that. which finds and produces crude oil . a brief discussion of its relationship with the upstream industry is useful: Upstream Industry CRUDE PRICE UPSTREAM The starting point of the pump price model is commonly referred to as the upstream industry. and in the open market structure that exists in Canada. and the delivery and sale of these products to the consumer. production. due to variables such as crude quality. from the exploration for potential crude or gas reserves. this study uses a fixed percentage of the Edmonton Par crude price as a standard assumption. rather than a fixed value. in several commodities trading centres around the world. Canadian producers are known as “price takers” rather than “price setters” of crude prices. which it does on a continuous basis. In providing historical comparisons of crude to rack/pump prices. Within the scope of this study. Infrastructure The upstream oil industry encompasses a broad range of operations. which gives an accurate portrayal of month-to-month crude price fluctuations.the raw material from which gasoline is made. MJ ERVIN & ASSOCIATES 8 . its marketing operations). our crude prices rise and fall according to price benchmarks established far beyond our own shores. While this study focuses on the downstream industry (and in particular. Crude oil is a commodity which is traded in a global marketplace. Canadian producers must compete to sell their production to refiners.

which in oil producing provinces such as Alberta. and hopefully realize some production. as a factor of the regular gasoline retail pump price. manufactures a range of refined petroleum products including gasolines. Petroleum Refining DOWNSTREAM MARGIN RACK PRICE REFINER MARGIN CRUDE PRICE Within the downstream oil industry there exists two distinct sectors: refiners. The focus of this study is on the marketing sector of the downstream petroleum industry. who manufacture petroleum products from crude oil. maintenance. or roughly 34 percent of the pump price.1 cents per litre. drill for. personnel. its predominant feature is the plant facility which. is the provincial government. From this revenue. oil producers must explore for potential reserves. put simply. buy refined products from the refiner and sell them to the end-use customer. MJ ERVIN & ASSOCIATES 9 . crude is only one of several factors that influence pump prices. day-to-day plant operations are cost-intensive. and pay out royalties to the resource owner. Some discussion of the interface between refiners and marketers is essential to a full understanding of the marketing function however. Infrastructure The petroleum refiner sector represents the manufacturing stage of the life cycle of petroleum products. This sector acquires crude oil. and marketers who. As is typical of many manufacturing organizations. As a general measure: Finding 2: 1996 average crude price. and from this feedstock. involving energy. and some attention to the refiner sector is therefore given here. is called the refinery. one of the key attributes of this sector is the very high capital cost of a refinery plant facility: roughly one billion dollars in today’s dollars. in the petroleum sector. and numerous safety and environmental safeguards. A modern refinery is a sophisticated work of engineering. heating fuels. Although a description of the process of turning crude oil into gasoline is outside of the scope of this study.While some suggest that the price of gasoline should rise and fall exactly with the crude price. and lubricants. diesel. In addition. was 19.

the gross refiner margin is the price at which the refiner sells its refined product. If for example. Although contract and transfer prices are distinct from rack price. refiners sell their product under a variety of arrangements. Contract and transfer prices are not openly shared. as they relate to negotiated. which can be broadly categorized as follows1: • • • rack price . reflecting the cost of transporting the crude from the producing region to the refinery plant. indicative of a competitive wholesale rack market. but with no material effect upon the Gross Product Margin derivation. On a national basis however. Of these three refiner prices. confidential terms between the seller and specific buyers. For simplicity. only rack price information is readily available in the public domain. Wholesale volume data is not readily available on a market-specific basis. contract price .this is the “internal” price charged by a refiner to the marketing arm of the same company. the relative competitive strength of any given rack market is difficult to assess.Price/Margin Model Elements For simplicity. Since both crude and rack prices fluctuate according to market forces. not the refiner sector. some clear competitiveness indicators exist.the price charged to a non-refiner marketer (or other sales channel customers) usually under the terms of a long-term supply agreement. there would be little or no market-driven competitiveness in the refiner sector. and a return on the considerable capital investment in the plant facility. and accordingly. 2 MJ ERVIN & ASSOCIATES 10 . rack prices also exist at many nonrefining centres where there is sufficient wholesale demand for petroleum product. since the market-driven rack price provides an objective. as this price point exists within the marketing sector. being squeezed or expanded between these two price points. The Bloomberg Oil Buyers’ Guide™ currently lists twenty Canadian rack points. which may cause Gross Refiner Margin to be slightly overstated. 1 Dealer Price is not included here. which provides an independent and objective determination of rack-based gross refiner margin. Historical data is readily available for crude and rack prices through publications such as Bloomberg Oil Buyers’ Guide™. This margin provides for plant operating costs as described above. For a competitive rack market to exist. While refineries are always rack price points. In fact the refiner typically pays a higher price than the benchmark crude price.the price charged for immediate supply on an “as available” basis. In fact. the gross refiner margin is elastic. In simple terms. representing major Canadian population centres. this model only uses the benchmark crude value. they use rack price as their basis. many of which do not have integral refineries. a considerable volume of petroleum product must actually trade using rack price as the transaction basis. less the price at which it bought its raw material2 (rack price minus crude price). transfer price . the pump price model uses the term “rack price” to refer to the refiner’s sale price of refined petroleum. external measurement of the current market value of a particular petroleum product. Canadian refiners produced only sufficient product to supply their own networks of retail facilities. The existence of rack price in a given market is not of itself.

rack prices are also demonstrably competitive in the sense that there is historically a high degree of price uniformity between any two rack points in North America.000 km) for overland truck transport. as there is no obvious market mechanism to regulate its setting. in order to maintain realistic accountabilities within each of the two sub-sectors. but where pipeline or marine fuel terminal facilities exist. The mechanisms that drive rack prices are more fully discussed on page 36. market-driven Rack (wholesale) pricing of petroleum products. petrochemical producers. and which supply petroleum to about one-third of all retail outlets in Canada1. due to the relatively small transportation cost.Competitiveness in the Canadian Rack Marketplace A great deal of Canadian refinery output is sold outside of the refiner’s own marketing infrastructure . the question of the internal selling price. arises. or transfer price. would produce better than expected refiner income. but at the expense of marketing income. There is no “windfall” profit in setting an unrealistic transfer price: a higher than market transfer price. With a large proportion of the Canadian population within a few hundred kilometers of the United States and/or able to receive marine supply. to so-called “independent” petroleum marketers. The range of potential refiner sources from which a marketer can choose is largely dependent on the transportation costs involved in bringing the product from the refiner’s rack point (ie: the bulk distribution terminal) to the destination market. for example. this limits a marketer to a relatively short range (perhaps 1. wholesale refined product is bought and sold across very large distances. These independent marketers naturally seek to purchase their product at the lowest available cost (rack price or a negotiated contract price). it follows that: Finding 3: The infrastructure of the Canadian refiner sector provides the necessary conditions required for competitive. but with their US and European counterparts. to major industrial consumers. most refiners also participate in the marketing and retailing of petroleum products. In practice. or close to.for example. many US and European refineries are in practice. Integrated Refiner-Marketers In Canada. from any one of several regional refiners. In these cases of so-called “integrated” refiner-marketers. Canadian refiners must therefore be price competitive not only with each other. In practical terms. 1 Based on Octane Magazine Retail Outlet Survey data. even overseas. who themselves do not refine petroleum products. market-driven rack prices. who compete for a share of this demand. In examining the structure of the Canadian refiner sector. integrated refiner-marketers establish transfer prices at. As shown in Figure 15 (page 35). MJ ERVIN & ASSOCIATES 11 . and in the case of gasoline. potential sources of wholesale product supply for most Canadian non-refiner marketers.

For this reason. and aviation. home heating. each with its own distinct infrastructure. Wholesale Sales to a wide variety of customers. Direct sales consumers do not use the infrastructure associated with the refiners’ own brand. as detailed in Table 1: • Direct Sales to major customers who generally purchase several million litres of petroleum product annually.Petroleum Marketing DOWNSTREAM MARGIN EX-TAX PUMP PRICE RACK PRICE MARKETING MARGIN PRODUCT MARGIN FREIGHT The petroleum marketing sector represents the final stage of the pump price model. • • MJ ERVIN & ASSOCIATES 12 . Product is either delivered to the customer by the supplier’s (or an associate of the supplier’s) tank truck. Retail Sales to the domestic motorist. Infrastructure Although most consumers associate petroleum marketing with retail gasoline stations. gasoline price and competitiveness issues attract considerable public. Marketing operations within this sector can be broadly classified into three elements. farming. in the minds of many consumers. principally into commercial trucking operators’ vehicles. and who essentially deal directly with the refiner. as a popular and relevant “window” on the petroleum marketing sector. media and regulatory attention. trucking. product is sold from a central facility. this study focuses upon price and competitiveness factors that relate to retail gasoline marketing. and purchase at or near the established rack price. this is only one (albeit an important one) of several sales channels that exist within the petroleum marketing sector. including mining. which “sets” the retail price of gasoline. the most recognized element of the downstream oil industry. or in the case of cardlock facilities. It is this sector which has direct contact with the petroleum consumer and it is this sector. Within this industry sector.

to the motorist consumer. typically at the “rack point”. Sales to spot buyers at posted rack price. Sales to commercial and industrial accounts by the wholesale marketing sector.500 retail gasoline outlets in Canada. which is generally less than the rack price. Primary Brand Second Brand Retail gasoline sales through the principal brand name associated with the supplier. There are over 850 cardlock outlets in Canada. These outlets usually have considerable inventory capacity. In major centres dedicated Home Heat centres provide this service. and regular gasoline in particular. Direct sales generally do not involve any marketing sector infrastructure. Sales to major industrial accounts. MJ ERVIN & ASSOCIATES 13 . There are over 1. Sales of home heating fuels to residential furnace oil customers.300 bulk sales outlets in Canada. Before examining this sector in detail. in smaller centres. often delivered by pipeline or ship/barge. Bulk Sales Home Heating Aviation RETAIL The remainder of this study provides a detailed examination of the retail petroleum products industry in general. usually involving some aspect of the marketing sector infrastructure. There are about 16. The name “cardlock” refers to the coded access card which the customer uses to activate the fuelling pump at the outlet. according to the contractual relationship between the supplier and the dealer. which primarily serve long-disttance truckers and commercial delivery and haulage operators. Some larger petroleum marketers also operate a network of retail outlets which are identified with a different brand than the primary. Sales of aviation fuels at major and secondary airports across Canada. such as product transport and/or storage. one final element of the pump price model must be reviewed. using delivery tank trucks. Sales to non-refiner petroleum marketers.Table 1: Downstream Sales Channels Sales Channel DIRECT SALES Major Industrial Spot Rack Contract Supply WHOLESALE Infrastructure Description Sales to major accounts. Sales of petroleum products (principally gasoline) through retail gasoline outlets. and usually supply customers by delivery to the customer’s own storage tank. to the aviation fuel consumer. Retail outlets are operated in a variety of modes. for example. Sales of petroleum products through bulk sales outlets. as discussed. heating fuel delivery is an integral part of a bulk sales outlet. Cardlock Sales of petroleum products through a network of consumer-operated fuel dispensing facilities. as principal elements of petroleum marketing operations. by delivery tank truck. at a negotiated contract price.

PST). which amount to 28. the tax content of retail gasoline in Canada has increased steadily over several years. and seven percent GST. tax content does fluctuate somewhat with pump price changes. 1 Due to the application of GST (and in Quebec.2 cent (0. regardless of market conditions. in a small number of markets. The petroleum industry acts as a collector of these taxes. As part C of this study shows. this decrease is reflected in a reduced gross product margin the tax content stays essentially the same1.3 in Quebec) drop in the tax content. If the pump price decreases for example. stable amount. municipal taxes. would include a roughly 0. provincial sales tax. MJ ERVIN & ASSOCIATES 14 . 1995 product taxes on retail gasoline alone represented approximately 9 billion dollars in federal and provincial government revenues.6 cents per litre (Canada 1996 10-city average). A three-cent drop in pump price. Table 2 shows the provincial tax content for retail gasoline. or roughly 50 per cent of the pump price. typically made up of: • • • • a ten cent per litre federal excise tax. the tax content of the petroleum price is essentially a pre-determined.Taxation on Petroleum Products PUMP PRICE TAX EX-TAX PUMP PRICE Unlike gross product margin. for example.

0 3.6 22.7 30.8 4.7 3.2 10.7 13.0 27.0 10.5 6.5 12.0 GST content (7% of pump) 3.0 10.5 14.5 cents was introduced in the Montreal and surrounding area in 1996.0 cents is charged in the greater Victoria and Vancouver areas respectively. All Quebec gasoline sales are subject to a 15.0 9.2 24.0 10.3 Federal Excise Tax 10.6 3. Quebec pump taxes are reduced by varying amounts in certain remote areas and in markets within 20 kilometers of provincial or US borders.5 cents and 4.2 24. 1996 (City)Province BC (1) Alberta Saskatchewan Manitoba Ontario Quebec (2) New Brunswick Nova Scotia PEI Newfoundland Yukon NWT Canada Ave.0 10. Provincial Tax 11.0 28.Table 2: Taxes on Regular Gasoline on December 31.0 16.4 3.5% sales tax applied to the GST-inclusive pump price.1 25.0 15.3 20.0 11.0 3.1 32.0 4.0 10.0 10.6 3. MJ ERVIN & ASSOCIATES 15 .6 3.5 Total Tax 24. An additional pump tax of 1.7 18. plus a 6.0 28.6 3.0 10.3 10.5 3.3 27.0 14.0 10.8 note 1 note 2 An additional tax of 1.0 10.2 cent per litre pump tax.0 10.6 25.9 3.0 10.0 10.

Refiner operations realized 5.8 ¢ TAX 28. or 9 percent. some profit return for the shareholder.Regular Unleaded1 NOT TO SCALE PUMP PRICE 56. and the retail gasoline sub-sector in particular. to derive a representative value for regular gasoline gross product margin in Canada. Figure 2: 1996 Average Prices/Margins .5 cents per litre (after freight cost). this section provides a view of the Canadian petroleum marketing sector.Part B The Structure of the Retail Petroleum Products Sub-Sector While part A of this report established a conceptual framework of Canada’s petroleum industry.4 ¢ 19. MJ ERVIN & ASSOCIATES 16 . namely the dealer’s costs and income. was available for product marketing operations.1 cents per litre.5 ¢ 0. This 1 Prices and margins reflect a Canadian 10 city average. The residual. or 34 percent of the pump price.3 percent of the average regular gasoline posted pump price. It also provides an overview of the industry in terms of several infrastructure parameters.3 cents per litre. including retail outlet distribution. Upstream operations realized 19.6 ¢ EX-TAX PUMP PRICE RACK PRICE DOWNSTREAM MARGIN MARKETING MARGIN REFINER MARGIN UPSTREAM PRODUCT MARGIN FREIGHT 3. Pump Price/Margin Model: An Integrated View Having reviewed each of the four key pump price/margin model elements.1 ¢ 5. 3.3 ¢ CRUDE PRICE source: Natural Resources Canada • • • • Tax accounted for 28. the brand supplier’s costs. based on regular unleaded gasoline.3 ¢ 28.2 ¢ 24. operating modes. or 50.6 cents per litre. and potentially. Figure 2 integrates the pump price model with NRCan 1996 regular gasoline product prices (10-city average). and ancillary operations.

was 5. As the product leaves the refinery plant. is defined by the marketdriven price points of ex-tax pump price. Although many petroleum marketers conduct their own freight operations. Freight cost does not typically fluctuate.gross product margin represented 6 percent of the Canadian average regular gasoline pump price. it falls into the domain of the marketing sector. The marketing sector then. In referring to marketing margins and product margins. The gross marketing margin.5 cents per litre. and is often out-sourced to third-party common carriers. See page 10 for further explanation. was 3. this is seen as a “non-core” business.3 percent of the average urban price of regular gasoline in Canada. In 1996. or “rack to retail” margin. as part C will describe. and it is depicted in Figure 1 as a fixed cost element. the average Gross Refiner Margin available to Canadian petroleum refiners to provide for all operating costs and profits on the manufacture of regular gasoline. Both refiner and marketing margins have been in decline over the past several years. for example) is sold/transferred at the current rack or transfer price. petroleum taxes accounted for 50.3 cents per litre. Based on the 1996 data. is the second of two elements of the downstream oil industry. This margin represents the revenue which provides for two key operations: • Freight: Freight (or distribution) is the transportation of petroleum products from the rack or refinery point to the final point of sale. and is then transported to the retail outlet. three key findings can be stated: Finding 4: Finding 5: In 1996. It is this sector which provides the entire infrastructure for bringing refined petroleum products from the refinery plant facility to the ultimate end-use consumer. In 1996. which in the case of retail gasoline. Bloomberg rack price values were used as the assumed wholesale price. the finished product (gasoline. is usually the gas station. the average Gross Product Margin available to Canadian petroleum marketers to provide for all operating costs and profits on the sale of regular gasoline in a typical urban market. and rack price. Freight MJ ERVIN & ASSOCIATES 17 . Finding 6: Marketing Sector Overview DOWNSTREAM MARGIN EX-TAX PUMP PRICE RACK PRICE MARKETING MARGIN PRODUCT MARGIN FREIGHT Once the refiner has completed its work.

incur a variety of costs. Figure 3: 1996 Average Regular Gasoline Margins (56. rural markets experience higher pump prices than do larger centres. which are typically close to a wholesale rack point. but can be as high as 3 to 4 cents in markets more distant from the refinery point: this partially explains why some small. • Product sales: Within this domain. and upstream/refiner margins.3¢ source: Natural Resources Canada The determination and comparison of gross product margins in selected markets is a key objective of part D of this study. typical of any retail business. As represented in Figure 3. petroleum marketers. together with gas station dealers. as it represents 80% of all retail gasoline sales.6¢ Refiner Operations 5. an average gross product margin for regular gasoline in a major Canadian city was 3.5¢ Product Operations Freight 0.costs are generally less than one-half cent per litre in most major Canadian cities.3¢ 3. storing and dispensing a product such as gasoline adds considerably to the operating cost.8¢ Pump Price) Upstream Operations 19. Modern pump and underground tank installations have greatly reduced the environmental and safety concerns associated with petroleum products.5 cents per litre in 1996. Unlike most other retail enterprises however. as it excludes the “outside variables” of tax. Midgrade and premium grades (which have a higher octane content) represent 5% and 15% of MJ ERVIN & ASSOCIATES 18 .1¢ Tax 28. This is a particularly useful measurement in comparing retail gasoline markets. and is therefore a poor comparative tool. Grade Differentials Most of the Canada average product prices cited in this study refer to regular unleaded gasoline (RUL). but at an average cost of over $200.000 per outlet. freight. Posted pump price includes all of these variables. Gross product margin is therefore defined as gross marketing margin less freight cost.

44 (1st Dec. Irving. one must ask how marketers compete. marketers have attempted with some success to differentiate their product offerings from other brands.). Jerome McCarthy. Place. and accordingly. marketers compete to be represented in as many and/or the best locations as possible. Although revenue from this product is factored into the study market economics in Part D. Place Typically. Competitiveness in the Retail Gasoline Sub-Sector Retail Competitive Practices and Indicators A retail gasoline marketer competes at many levels: At a general level. Examples of competitiveness relating to place include: • opening new or upgrading existing facilities. 4th Ed. but most consumers view gasoline as a commodity. etc. but in 1995 was typically 5 cents per litre for midgrade. Today. propane vs. 1971).retail gasoline sales respectively1. Today. Basic Marketing: A Managerial Approach. marketers compete for the consumer’s choice of transportation energy (for example. Ill. Environmental concerns and associated costs have dictated greater selectivity in developing new sites. seasonal blends. 2 E.” or four P’s: Product.: Richard D. In the 1960’s and 1970’s this type of competitive activity was evident in the retail gasoline sector.. gasoline). competitive strategy of this type focuses heavily on selecting the best place. competitive activity can be observed when a marketer alters one or more of the variables at their disposal. 1 Diesel is another petroleum product sold at many retail outlets. In order to measure competitiveness. as gas stations proliferated. Price competition has forced marketers to optimize outlet revenue. (Homewood. or when comparing price levels between markets. Higher octane grades are more expensive than RUL. p. will ultimately purchase based on price. rather than the most places. RUL prices are therefore most often cited when relating historical price trends. commonly known as the “marketing mix2. Simply put. expanded product/services offerings such as convenience items. it represents a very small percentage of total retail petroleum sales. and the price difference between these grades and the RUL price is referred to as the grade differential. 1960) MJ ERVIN & ASSOCIATES 19 . and Promotion. The grade differential varies somewhat from city to city. a number of factors preclude this type of strategy. A portion of the market certainly responds to this type of competitive strategy. Prices for midgrade and premium grades are established in the same way as RUL prices: through competitive activity. This study does not examine such a broad issue however. page 24). This has resulted in a decline in the number of retail outlets in the past two decades (Figure 5. additives. and confines itself to the more specific (and popular) issue of brand competition for retail gasoline. Specific competitiveness indicators relating to product would be: • • • introduction and promotion of gasoline grade features such as octane content. Price. • Product In the past decade. and 9 cents per litre for premium gasoline.

MJ ERVIN & ASSOCIATES 20 . Establishing an objective measurement of price as a competitiveness indicator however. gasoline is a commodity. and due to the already slim margins available to marketers. fluctuating pump prices are a significant indicator of robust competition among marketers. volatile prices .contrary to some public perception. Price Uniformity and Volatility As the degree of price uniformity and volatility in the retail gasoline sub-sector is often perceived as synonymous with its competitiveness. • Price In most markets. and therefore “trades” within a relatively narrow price range. This study therefore focuses on the nature of product price as a measure of competitiveness in the Canadian “rack to retail” sector. this study examines the dynamics of price competition in considerable detail. is less clear. In this context. free item with purchase or special price item with purchase. • • • While examples of all of these indicators are abundantly in evidence. As such.that pump prices are almost universally displayed on highly visible outlet billboards is indicative of the importance of price as a key selling feature. low prices and/or margins. This study presents an extensive historical and comparative analysis of pump prices. their subsector margins. in fact it is indicative of some consumer perception that one brand of gasoline is essentially the same as the next. it is useful to address some of the general competitive mechanisms behind these particular competitiveness indicators. price clearly remains the predominant competitive tool used by Canadian gasoline marketers. Promotion In the gasoline retailing sub-sector. gasoline is viewed by consumers as a commodity uniform in quality and widely available. promotion strategies generally attempt to provide the consumer with added value without resorting to pump price reductions. uniform prices . Promotional activity seems to have decreased in the past few years. due to the largely commodity nature of petroleum product. and more importantly.• • closure of non-viable outlets. Examples are: • prominently displayed prices . price has proven to be the most widely used competitive tool by gasoline marketers. Examples of promotional competition are: • • • brand identity gasoline discount coupon. Consequently.while uniform pump prices are sometimes cited as evidence of industry collusion. caused by price competition. probably due to its relatively high cost. volatile pricing manifests itself in the form of a price war (see below). At its extreme.

MJ ERVIN & ASSOCIATES 21 . facilitated through street price signs. are indicators of a competitive market. A common factor in both falling and rising prices is the posted price sign: it is this device that instantaneously communicates pump prices not only to consumers. in order to maintain a reasonable market share. the effect on many consumers is immediate: they will drive into that station. There have been examples of this margin being squeezed to a point that is insufficient to cover operating costs. assuming that the rack price is unchanged. Finding 7: Price uniformity and price volatility. who then react quickly to the change. obviously at the expense of the supplier margin. While this support may take one of several forms. But if the pump price increase is a reasonable reflection of the underlying change in gross product margin. competitors may not follow. Pump price signs are an ubiquitous feature of the retail gasoline industry. The effect of this upon the gross marketing margin is obvious: it is squeezed. If the posted price increase is too high.When pump prices are uniform. in an attempt to gain market share. or even being squeezed to zero . and provide to the dealer what is commonly referred to as price support. This price lowering mechanism may sometimes result in a “price war” if each competitor continues to undercut the other. gross product margin will eventually diminish to a point that is not viable for a majority of competitors. adjacent dealers. This is a misconception. 1 This does not occur at company operated or commission outlets. bypassing the higherpriced outlet. In the case of lessee or independent dealers however. To understand the phenomenon of uniform pump prices. Whether through falling pump prices or rising rack prices. but to competitors. Pump prices therefore tend to move uniformly within a very short time. The other dealer has little choice but to quickly match. there are times (during a price war in particular) when the retail pump price may fall to a level that provides the dealer with an insufficient margin1 to meet operating costs. or even undercut the competitor’s lower price. Price Support In times of “normal” pump prices.where the ex-tax pump price is equal to. and gasoline is perhaps the only consumer product in Canada that is so consistently advertised in this way. If one dealer decides to reduce pump prices (by two cents. competitors will likely match this price. since there is no “dealer margin”. or when prices rise or fall apparently in unison. since they too must restore their gross product margins to sustainable levels. When this occurs. it is often cited as evidence that marketers engage in direct communication to “fix” prices at an agreed-to level. the wholesale rack price. One of these competitors will be forced to make a difficult decision: to be the first to raise pump prices in order to restore gross product margins to a viable level. its effect is to restore some measure of the dealer margin. one must adopt the perspectives of both consumers and competing. for example). the relationship between the supplier and dealer is generally as described on page 25. or even less than. the supplier may temporarily intervene.

Nova Scotia market may provide an example of the potential negative consequences of direct intervention. or of direct government intervention in marketing. Prince Edward Island is the only province which directly regulates gasoline and fuel oil prices. resulting in 9 convictions.Under the provisions of some price support mechanisms. control over retail pump price effectively reverts to the supplier. Quebec has recently passed legislation which prohibits the selling of (retail) gasoline or diesel at a price which is lower than the (wholesale) cost to a retailer in any trading “zone”. most with the general mandate of examining the “fairness” of competition and pump pricing among petroleum marketers. the Bureau found that there was no evidence to support these allegations1. but reverts back to the dealer when the support arrangement is ceased. provincial and even municipal levels. There are few current examples of direct government intervention in the pricing of petroleum products. the Bureau investigated four well-publicised allegations of anti-competitive behavior on the part of major oil companies in the spring and summer of 1996. Price Competition and the Regulatory Process All retail competitiveness in Canada comes under the purview of the Competition Act. Conspiracy: where several competitors act to fix prices for the purpose of reducing competition. Price maintenance: where a supplier exerts upward influence on prices upon a dealer. is beyond this study’s scope. An examination of the effect of the Competition Act. and a brief discussion of this case appears in part D. While this study does not intend to undertake a detailed review of the effect of the Act. Perhaps the most notable of these was the 1986 Restrictive Trade Practices Commission (RPTC) study “Competition in the Canadian Petroleum Industry”. however. The Bureau enforces provisions of the Act which prohibit: • • • • Abuse of dominant position: where a firm (or several firms in collaboration) uses its market power to lessen competition. A review of historical retail pump prices in the Halifax. 1997 MJ ERVIN & ASSOCIATES 22 . More recently. Following a year-long investigation. In addition. In addition. in the past twenty-five years the Bureau has prosecuted a total of 11 violations within the Canadian retail gasoline sector. Price discrimination: where a supplier charges different prices to competitors in the same market who purchase similar volumes of products. 1 Competition Bureau press release “Gasoline enquiries find no evidence of anti-competitive behavior” dated March 18. which is administered by the federal Competition Bureau (Industry Canada). The outcome of the RPTC study can generally be characterized as acknowledging that a healthy state of competition exists in this industry. These cases have largely involved local dealers and/or isolated incidents. the petroleum marketing sector has been the subject of several inquiries at federal.

Retail gasoline sales. The high cost of building a modern retail gasoline outlet for example. As a product group however. a consequence of regulations which stipulate minimum standards for the design and construction of petroleum storage tanks.500 retail gasoline outlets across Canada. or incentive for. policy or regulation can be deemed to be a competitive factor if it: • • • • creates an obstacle to. one can cite examples of regulatory obstacles to exit from the retail gasoline market. a competitive climate. Finding 8: Some competitiveness inhibitors may exist in the retail gasoline market which are regulatory in nature. Many smaller retail owner-operators. This may have the effect of reducing volume and revenue potential at other retail sites in the vicinity. inhibit competition. Conversely. it is clear that government policy plays an important role in facilitating. It is important to acknowledge that many regulations affecting the retail gasoline industry. higher pump prices. So defined. it is the single largest one. and is the single largest market for gasoline products. in the form of standards for the decommissioning of retail petroleum sites. promotes or limits market-driven pump prices. These regulations clearly exist to the benefit of all. Retail Gasoline Demand Gasoline is but one of many products produced by the Canadian downstream industry (Figure 4). and at least some of this capital cost is regulatory compliance-driven. and consequently. to some degree. but the considerable investment represented by a modern retail outlet has the effect of limiting market entry to those with sufficient capital to put at risk. A practice. that is. or inhibiting. exit from an non-viable market. accounts for about 37% of all refined petroleum demand in Canada. sales of gasoline through the roughly 16. may find it more attractive to continue operating a marginally viable gasoline outlet than facing the cost associated with the removal of inactive tanks and/or potentially contaminated soil. accounting for roughly 88% of all gasoline demand. entry into an attractive market. accounting for 41% of all petroleum demand. creates an obstacle to. MJ ERVIN & ASSOCIATES 23 . for safety and environmental protection. creating a need for higher margins. is in part. as outlined above. improves or reduces a “level playing field” in terms of the ability of one market to compete with another on the basis of price or operating costs. or incentive for. but exist to meet other important societal needs. This issue is discussed more fully in part D. particularly in smaller population centres.Competitiveness Factors (Drivers and Inhibitors) Competitiveness factors can be defined as those forces which act upon the industry to increase (drive) or decrease (inhibit) competitive practices.

as shown in Figure 5.7% Lube/Grease 1.2% Other 0. Figure 5: Canadian Retail Outlet Population .2% Propane /Butane 2. nor is there any federal or uniform provincial enumeration of retail gasoline outlets.9% PetroChem Feedstocks 5. This survey accounts only for major established retail networks . This study provides an estimate of the actual retail outlet population.6% Other Gasoline 4.1988-1995 24000 22000 Estimate of Actual Outlet Population 20000 Octane Magazine Survey 18000 16000 14000 1988 1989 1990 1991 1992 1993 1994 1995 source: Octane Magazine (estimate by MJ Ervin & Associates) MJ ERVIN & ASSOCIATES 24 .Figure 4: 1995 Refined Petroleum Products Demand by Product Category Naptha/Avgas/ Stove/Kero 6.it has no practical means to enumerate each and every outlet.3% Total Sales Volume: 84.2% Asphalt/Coke 4.452 Million Litres source: Statistics Canada (Cat# 45-004) National Retail Petroleum Outlet Representation The most frequent source of information on the population of retail gasoline outlets in Canada is the Octane Magazine Annual Retail Survey.2% Retail Gasoline 37.7% Light/Heavy FuelOils 14.9% Diesel Fuel 22.

The supplier.000 outlets in 1989.513 723 source: Octane Magazine Retail Petroleum Outlet Modes The retail gasoline marketing infrastructure is much more complex than represented in Figure 1. There are two main stakeholders involved in the marketing of retail gasoline: the supplier.The estimated number of retail outlets in Canada has declined from 22. exist between retail dealers and their suppliers. and this is of some importance with respect to the matter of prices and competition in this sector. Company Operated outlets have no MJ ERVIN & ASSOCIATES 25 . Distribution of these outlets by province (Figure 6. Figure 6: 1995 Retail Outlets by Province PE 136 Northern Canada 65 576 NF 711 657 NS NB QU 3777 1610 BC 1716 AB SK 911 MB ON 3631 Total = 14. the retail outlet is owned and operated entirely by the product supplier. Several possible relationships. controls the setting of the pump price. Company Operated MARKETING MARGIN PRODUCT MARGIN = BRAND SUPPLIER MARGIN FREIGHT EX-TAX PUMP PRICE RACK PRICE In this mode. The principal dealer and attendants are salaried employees of the supplier. using Octane counts only) is roughly equivalent to population densities. and the dealer. or modes. as owner of the product. who manages the day-to-day operations at the retail outlet. as one might expect. and all inventory and revenues belong to the supplier. who holds initial title to the refined petroleum as it leaves the rack point.500 in 1995. to about 16. and usually owns the brand name seen at the retail outlet.

The “dealer” is in essence. the “dealer” is actually an employee of the supplier supplier supplier typically the supplier 15% Control of Pump Price Dealer Compensation Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Commission Operator MARKETING MARGIN PRODUCTCOMMISSION EXPENSE MARGIN FREIGHT EX-TAX PUMP PRICE RACK PRICE In this mode.sub-component margins .the entire gross product margin accrues to the brand supplier. the supplier retains control of the retail pump price. who may pay the supplier a lease fee for the use of merchandising space 26% Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Lessee EX-TAX PUMP PRICE MARKETING MARGIN PRODUCTDEALER MARGIN MARGIN BRAND SUPPLIER MARGIN FREIGHT DEALER PRICE RACK PRICE In the lessee mode. Control of Pump Price Dealer Compensation supplier a commission from the supplier. The dealer in turn hires attendants. the supplier typically owns/controls the principal outlet facility which in turn is leased out to the dealer or lessee. supplier salary from supplier. but the outlet operator (“dealer”) is compensated by a commission payment. the outlet facilities and petroleum inventory is owned by the supplier. Since the supplier owns the petroleum product at this type of outlet. The lessee purchases petroleum MJ ERVIN & ASSOCIATES 26 . and pays them from his commission revenue. usually based on cents per litre of petroleum sales. based on pump sales volume. an employee of the supplier supplier supplier typically the dealer. who pays all outlet operating costs.

product from the supplier at a “Dealer Wholesale” price. The dealer pays most or all of the expenses associated with operating the outlet. Control of Pump Price Dealer Compensation dealer dealer buys product from the supplier. unlike rack or pump prices. can vary considerably from one supplier to another. dealer-established retail price. since it is predicated on contractual arrangements between the dealer and the supplier. The margin between these two prices is the dealer’s gross revenue. MJ ERVIN & ASSOCIATES 27 . The margin between these two prices is the dealer’s gross revenue. and means of compensation dealer dealer dealer 45% Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Lessee or Independent outlets are the only modes in which a true dealer margin exists. and in turn resells to the motorist consumer at a higher pump price established by the lessee. This dealer margin is defined as the pump price (ex-tax). and has control over the retail pump price. less the Dealer (wholesale) Price charged by the brand supplier. and sells at the posted pump price. Control of Pump Price Dealer Compensation lessee lessee buys product from the supplier. the retail facilities are owned by the dealer. and sells at the posted pump price. who may pay the supplier a lease fee for the use of merchandising space 14% Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Independent Dealer EX-TAX PUMP PRICE MARKETING MARGIN PRODUCTDEALER MARGIN MARGIN BRAND SUPPLIER MARGIN FREIGHT DEALER PRICE RACK PRICE In this mode. not the supplier. The distribution of retail outlets by mode has some important implications concerning the nature of gasoline pricing and competition. This Dealer Price. and means of compensation supplier. The dealer buys the petroleum product at a Dealer Wholesale price and in turn resells to the motorist consumer at a higher. who would typically charge a lease fee to the dealer for the use of the facility lessee typically the lessee.

Petro-Canada. or Imperial Oil). during a price war) as previously described. In addition.Figure 7 shows that of all retail outlets in Canada less than half operate as company or commission dealers. 1 Unless the dealer is under a price support arrangement (for instance. This further limits the direct influence that a major oil company might have upon the Canadian retail marketplace. This is significant: dealers who operate as lessees or independents are directly responsible for deciding upon the retail pump price. The remainder represent one of over 50 different marketer organizations. MJ ERVIN & ASSOCIATES 28 . and fully two-thirds operate as lessees or independents. Therefore: Finding 9: Pump prices are established by the local dealer at over half of all retail outlets in Canada1. While a complete discussion of average throughputs in typical Canadian markets will take place in part D of this study. who themselves establish pump prices. It therefore follows that no single oil company has a position of absolute dominance over the Canadian retail gasoline sector. Roughly half of all retail outlets in Canada represent a major integrated oil company (Shell. virtually none of the major integrated outlets are company operated. There is some evidence that there is a higher percentage of lessee and independent outlets in smaller markets than in large population centres. Figure 7: Outlet Representation by Mode 16000 14000 12000 10000 8000 6000 4000 2000 0 Total outlets Major integrated Others 2235 3821 Company Operated Commission Dealer Lessee Independent 2022 9 2061 1059 Company Op 2226 1760 963 2298 6435 4137 source: Octane Magazine Outlet Throughput A key measure of outlet performance and viability in the downstream industry is the monthly or annual outlet throughput of petroleum products. some general figures are mentioned here. It follows that pump prices tend to be somewhat more directly controlled (ie: at the local community level) in smaller markets than in larger markets.

who may pay the supplier (who is typically the owner of the facility) a lease or franchise fee for the use of the retail space. Figure 8: Outlet Representation by Service 4000 3000 2000 1000 0 Car Wash CStore Kiosk Propane Service Bays source: Octane Magazine MJ ERVIN & ASSOCIATES 29 . Based on a sampling of outlets surveyed in this study.While an average outlet throughput may be in the order of 2.a result of significant retail outlet rationalizations (see Figure 5) which the petroleum products industry has undertaken. feature both a large-area convenience food store and a modern car wash facility. and is a result of. Most ancillary services are operated by the dealer/lessee. In fact. these study findings show that this can vary widely from market to market. In effect.5 million litres. Figure 8 depicts the Canadian representation of several key ancillary services. the revenue from so-called ancillary services is an increasingly essential element of retail gasoline marketing. has had a profound effect on the retail gasoline marketing sector. average annual throughputs ranged from under 1 million litres in smaller population centres. which in part has led to a reduction in retail product margins. reduced petroleum margins. to over five million litres in major markets such as Toronto. Canadian throughputs have dramatically improved in the past several years . more fully described in part C. Ancillary Services Very few if any retail gasoline outlets limit their product offerings simply to gasoline. ancillary service has had the consequence of subsidizing the pump price of gasoline. These improved outlet throughputs have provided for improved petroleum revenue potential. The proliferation over the past two decades of ancillary services such as convenience stores and car washes. Many outlets have more than one ancillary offering: many “flagship” outlets for example. Improved outlet revenue from ancillary operations has caused.

Since rising prices are common to most consumer goods and services. Gasoline and the Consumer Price Index A common perception among consumers is that gasoline prices are steadily rising. Unless noted. particularly around 1990. and with which the reader should be familiar. an examination of the specific historical record of gasoline prices is useful. many utilize terms which are explained in part A. including smaller markets.Part C Historical Trend Analysis This part of the study examines several historical price and margin trends in the Canadian retail gasoline sector. While some of the presented findings are selfexplanatory. using a Canada 10city weighted (by provincial demand) average. mainly using Canada average values. MJ ERVIN & ASSOCIATES 30 . as can be seen in part D of this study. the “Canada average” price reflects an average of urban markets only1. Regional and market-to-market comparisons are presented in greater detail in part D. As such. prices are for regular unleaded (RUL) gasoline. Since 1 Data is not regularly collected on smaller markets. would be somewhat higher. An “all markets” average. Figure 9: Annual Gasoline Price (Cents per Litre) 60¢ Nominal 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Source: NRCan 15¢ 1986 1987 1988 Including Tax Constant $ Excluding Tax Nominal Constant $ 1989 1990 1991 1992 1993 1994 1995 source: Natural Resources Canada / Statistics Canada Figure 9 shows the Canadian 10-city average regular gasoline pump price. This shows that pump prices have increased in nominal terms. in nominal (actual) and constant (inflation adjusted) dollars from 1986 to 1995. when the Persian Gulf War caused crude prices to increase significantly. This part examines broad trends in several areas.

When compared to other consumer goods. and relative crude cost. as in Figure 10. 1986 = 100 Source: Statistics Canada Cat 62-010 Domestic Water Domestic Electricity Alcoholic Beverages Auto Repairs All Items Gasoline Fuel Oil Food Natural Gas Telephone Service source: Statistics Canada Key Price History Figure 11 depicts the history of Canada (10-city) monthly average regular gasoline pump prices. as defined in part A of this study. nominal pump prices decreased. Several observations can be made from this: • • • • fluctuations in average rack prices have closely followed changes in underlying crude costs. there appears to be little or no lead or lag in the timing of rack price fluctuations relative to crude price changes. Finding 10: Gasoline has remained at or below the “all items” Consumer Price Index nine out of the past ten years. When pump prices are reduced by the amount of tax content. In constant dollars. ex-tax equivalent prices.1990. MJ ERVIN & ASSOCIATES 31 . It also depicts the associated margins. both nominal and constant dollar prices are less in 1995 than in 1986: the constant dollar price of gasoline declined by 10 cents per litre from 1986 to 1995. gasoline prices have had a mitigating effect on the Consumer Price Index (commonly referred to as the CPI or inflation rate). and there appears to be no lead or lag in the timing of pump price fluctuations relative to rack price changes. retail pump prices were about 7 cents less in 1995 than they were in 1986. Figure 10: CPI Index Comparison . fluctuations in average pump prices (ex-tax) have closely followed changes in underlying rack prices. rack price.Selected Goods & Services 180 170 160 150 140 130 120 110 100 90 80 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Gulf War pushes crude oil prices upwards in 1990-91 Annual Averages.

From Figure 11 it can be seen that urban retail pump prices declined somewhat from 1991 to 1994. which in turn. then one might expect margins to be quite constant over time. that is. due to additional market factors which affect pump and rack prices at any given point in time. as might be suggested. as shown in Figure 12. the downstream industry operates on a “cost-plus” basis. If. as the next section shows. MJ ERVIN & ASSOCIATES 32 . and the rise in the tax content. the presence of these additional market factors have operated to the benefit of consumers. In fact. are principally a reflection of changes in the underlying price of crude oil. Figure 12 shows that industry margins have not been constant over time. it is also useful to examine the behavior of margins. It is important to state that pump price changes do not occur in exact lock-step with rack prices.Figure 11: Monthly Prices 1990-1996 (Nominal $) 70¢ Pump Price (Canada Average) 60¢ 50¢ Cents per Litre Pump Price excluding tax Tax Content 40¢ Rack Price (Canada Avg) Downstream Margin 30¢ Marketing Margin 20¢ Refiner Margin Crude Price 10¢ Jul-90 Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jul-96 source: Natural Resources Canada From these observations. it simply passes on a fixed cost margin to determine the “correct” pump price. and in fact have displayed a declining trend over the past six years. Margin History While Figure 11 provides an indication of key price trends. as Figure 11 shows. which are defined by the price points. This recent rise in pump prices is attributable to two factors: • • the rise in crude costs in this period. the following is evident that: Finding 11: Retail pump price trends are principally a reflection of changes in the underlying rack (wholesale) price of petroleum products. nor do rack prices exactly follow crude costs. and have risen slightly since 1994.

and has been a result of. Regular Gasoline Downstream (Marketing + Refiner) Margin 15¢ 10¢ Refiner Margin (rack .Figure 12: Monthly Margins 1991-1996 (Nominal $) 30¢ Tax Content 25¢ 20¢ Canada Avg. since the chart is based on monthly averages. not weekly or daily data. This shows that on a monthly basis.rack) Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Apr-91 Oct-91 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96 0¢ source: Natural Resources Canada Finding 12: Retail pump price increases from 1994 to 1996 are wholly attributable to increases in petroleum product taxation and crude costs. 1 In fact. including: • • • improved refinery efficiency as a consequence of plant rationalization and a modest demand increase. while average combined Gross Refiner and Gross Marketing Margins decreased by about 7 cents per litre. the gross marketing margin can fluctuate quite significantly1. MJ ERVIN & ASSOCIATES 33 . the average tax content of regular gasoline pump prices in major Canadian cities increased by about 5 cents per litre. emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. several factors. Finding 13: From 1991 to 1996. the actual fluctuation is much more pronounced than shown.crude) 5¢ Marketing Margin (retail . Figure 13 is a comparison of regular gasoline gross marketing margins from 1991 to 1996 for selected centres. A more thorough discussion of specific market factors for these and other centres appears in part D. The decline in refiner and marketing margins has both resulted in. In particular. compared to the Canadian average. which have both shown a consistent decline throughout the period 1991 to 1996. this upward trend is not attributable to “downstream” refiner or marketing sector margins. as local competitive factors act to self-regulate pump prices. improved retail outlet performance as a consequence of higher throughputs due to outlet rationalizations (closures) and demand increases.

Selected Centres 16¢ HALIFAX Canada Average 12¢ Price per litre 8¢ 4¢ 0¢ CALGARY TORONTO HALIFAX Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Apr-91 Oct-91 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96 (4¢) source: Natural Resources Canada (pump price inputs) & Bloomberg OBG (rack price inputs) Canada vs. although Canadian pump prices in urban markets are clearly higher than in the US. On an ex-tax basis. for several years. Figure 14: Canada / US Monthly Pump Price (Nominal $) 65¢ 60¢ 55¢ 50¢ Price per litre 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Apr-93 Oct-93 Jan-93 Jan-94 Jul-93 US Pump Price (Cdn ¢/l) Apr-94 Apr-95 Apr-96 Oct-94 Oct-95 Jan-95 Jan-96 Oct-96 Jul-94 Jul-95 Jul-96 Excluding tax Canada Pump Price US Pump Price (Cdn ¢/l) Including tax Canada Pump Price source: Natural Resources Canada MJ ERVIN & ASSOCIATES 34 . or even less than. with and without tax. Canadian pump prices have been roughly equal to. This difference accounts for most.Figure 13: Monthly Gross Marketing Margins. US Price History The retail gasoline tax structure in Canada is vastly different than the US. This shows that. is presented in Figure 14. US pump prices. if not all of the difference in pump prices between Canada and the US. A comparison of Canadian and US regular gasoline pump prices. this is wholly attributable to the difference in taxation. resulting in significantly higher Canadian gasoline prices.

Finding 14: Canadian retail gasoline pump prices are the competitive equal to those of the US. This would be a useful area for further research. The introduction of Reformulated Gasolines (RFG) into some US markets has caused prices to rise. From this it can be seen that Canadian and US rack prices. page 24) and somewhat increased demand. trading at any given time within a relatively narrow (about 2 cents per litre) range. • Although this study shows that on an ex-tax basis. RFG has not been introduced to Canadian markets. have improved considerably. as a result of outlet closures (see Figure 5. While these trends have also occurred in the US. which is reflected in US average pump prices. behave in a very similar fashion. This is no longer the case however. largely as a result of two factors: • Canadian marketing margins have decreased in this period. Rack Price History The behavior of rack or wholesale prices provides an indication of the degree of competition among refiners. Canadian consumers do not experience any retail gasoline pump price disadvantage to their US counterparts. Figure 15: Monthly Rack Prices: Selected Markets 31¢ 29¢ TORONTO SEATTLE (Cdn ¢/l) 27¢ VANCOUVER WINNIPEG Price per litre 25¢ 23¢ 21¢ BUFFALO (Cdn ¢/l) 19¢ 17¢ 15¢ Jul 93 Jul 94 Jul 95 Apr 93 Apr 94 Apr 95 Jan 93 Jan 94 Jan 95 Jan 96 Oct 93 Oct 94 Oct 95 Apr 96 Jul 96 source: Bloomberg Oil Buyers’ Guide / Natural Resources Canada MJ ERVIN & ASSOCIATES Oct 96 35 . both a cause and an effect of improved throughputs and ancillary revenues as previously described. Figure 15 compares these values for selected Canadian and US centres over a period of several years. there are likely some differences in the competitive dynamics in US markets compared to Canadian markets. Canadian ex-tax pump prices were historically somewhat higher than in the US. and moving up or down more or less in unison. when compared on an ex-tax basis. Canadian outlet throughputs (although likely still less than those of the US). Prior to 1994.

the price tends to be bid upwards. Pump Price (nominal ¢/litre) 3. Demand vs. of motor gasolines from 1991 to 1996. compared to average ex-tax regular gasoline pump price for the same period.900. As non-refiner marketers attempt to secure a supply of this diminishing inventory. Such a pattern is sometimes perceived as evidence of refiner or supplier “price gouging”. Yet in the latter half of each year. Figure 16: Monthly Demand vs. but in fact across the North American continent (US demand follows a similar pattern).100.000 24¢ 1.000 Jan-91 14¢ Jan-92 Jan-93 Jan-94 Jan-95 Ex-tax Pump Price (Canada avg.000 34¢ 2.900. and falling in the latter half of each year.100. To do so would invite the inevitable consequence of rack customers themselves sourcing their product needs from the rack point that offers the lowest price (plus freight expense). rising and falling closely in step with demand. Price History Figure 16 shows the history of Canadian gasoline demand. Gasoline demand exhibits a very regular seasonal pattern. or indeed anywhere. Gasoline price exhibits a similar. and prices tend to fall. conditions begin to favour a “seller’s market”.700.000 2.000 1. albeit less distinct pattern. a “buyers market” develops.000 2. as demand ebbs and inventory improves. and as would be expected in any commodities market under these conditions.000 1. Simply put. not only in a given market.000 2. or sales.500.000 2.That Canadian rack prices are so closely tied to those of the US is strong evidence of the interdependence of these two macro-markets.500.700. per litre) 12 Month Moving Average 19¢ 29¢ 44¢ Monthly Demand ('000's litres) 39¢ source: Statistics Canada (demand) / Natural Resources Canada (price) MJ ERVIN & ASSOCIATES 36 . This phenomenon actually illustrates the essence of how competition in the petroleum industry operates to self-regulate the price of gasoline: The rising demand for gasoline which occurs every spring has a diminishing effect on product inventories. increasing significantly every spring. any given Canadian or US rack point cannot successfully price its wholesale product substantially higher than that of any other rack market in continental North America.300.

while world crude prices and Canadian taxes have generally increased over the past several years. has operated in a highly competitive environment. the downstream petroleum industry. All of the findings suggest that. On a long-term basis however. which consists of the refiners and marketers of gasoline and other petroleum products. and this is clearly demonstrated in the case of gasoline prices on a seasonal basis. pump prices have increased due to a significant rise in crude costs in this period). despite a rise in demand. and it can be seen to operate as effectively in the Canadian petroleum products industry as it does in any open market. a feature of most marketregulated commerce. Figure 16 shows that from 1991 to 1995. The traditional supply-demand model predicts that when demand rises. while average ex-tax pump price declined by 14% (since 1994. This is of course. The next part of this study will undertake a comparative perspective: examining pump price and margin differences that exist between individual markets within Canada. This part of the study presented a number of historical views of retail gasoline prices. gasoline prices have not followed the traditional model. so do prices. the essence of a free market economy. which ensures a competitive product price for buyer and seller alike. and product taxes which add to the consumer price of gasoline. MJ ERVIN & ASSOCIATES 37 . in that prices have fallen.3%. demand rose approximately 8. as evidenced by declining industry margins.Whether in the spring or the fall. price fluctuations at the rack (and consequently at the pump) are a simple reflection of buyers and sellers alike. their related product costs and margins. competing to meet their own needs. Finding 15: Seasonal fluctuations in retail pump prices are ultimately linked to wholesale product inventory levels.

but contains two inherent limitations: • • data is drawn exclusively from major Canadian centres. there is no regular monitoring of pump prices in smaller centres. Part D of the study therefore has two main objectives: • an examination of a diverse array of markets in order to determine the degree of similarity or dissimilarity between them. play a role in a market’s pump price. and a more detailed examination of price. Nineteen markets were therefore adopted for the study (Table 3). freight. etc.. MJ ERVIN & ASSOCIATES 38 . and pump prices alone provide very little opportunity for “comparability”. • Methodology Selection of Markets A number of markets were selected for the study. A number of factors such as taxes. and in order to provide insights into the range of competitive dynamics that may exist. outlet costs. although one was subsequently dropped due to insufficient submitted data.Part D Selected Markets Study Introduction A review of public domain data on current and historical prices as presented in part C. namely product margin. These “outside factors” tend to obscure the more relevant aspect of pump price. which relates solely to that sector of the petroleum industry directly involved in using pump price as a competitive tool. margins and related implications for market competitiveness than can simply be provided by existing public-domain data. outlet volumes. ancillary revenues. is useful in providing broad overviews of industry price and margin trends. so that a broad range of the following criteria was represented: • • • • • population proximity to refinery proximity to primary supply point proximity to US border proximity to other retail markets Twenty markets were initially selected by the committee.

confidential data were collected and independently evaluated on 481 retail gasoline outlets in 19 Canadian markets. retail pump prices . member companies of the Canadian Petroleum Products Institute (CPPI) were approached to provide detailed outlet operating petroleum and ancillary revenue and cost data2 for a random sampling of outlets in each of the selected study markets.000. both the dealer and the product/brand supplier realize revenue and incur costs associated with an outlet. To this end.are influenced not by one. MJ ERVIN & ASSOCIATES 39 . Ontario. 2 Depending upon the outlet mode. Shell Canada. In addition. Petro-Canada.Each market was classified according to regional affiliation (BC/Prairie. and Quebec/Atlantic) and market size: Group A markets included population centres in excess of 500. Table 3: Selected Study Markets Total (19) Group A (8) BC/PR (9) Vancouver* Victoria White Rock Calgary* Winnipeg ON(4) Toronto Ottawa* QU/AT (6) Montreal* Group B (11) Nanton AB Peace River AB Regina* Thompson MB Sault Ste Marie* Sioux Lookout Chicoutimi* Gaspé Saint John NB* Charlottetown Halifax * forms part of ancillary revenue and cost analysis Sources of Data In order to conduct a detailed study market analysis of retail marketing operations. price history data not available through public sources.0001. and for smaller markets. and Group B markets less than 500. these organizations provided market-level data on freight costs.and consequently competitiveness . or “rack to retail” sector.. and Canadian Tire Petroleum. it was essential to obtain data not normally available through existing public sources. the gross marketing margin must be examined in isolation from those other variables. Five companies responded to this request: Imperial Oil. This study compiled both sets of financial data in order to produce a net revenue/cost per outlet picture which eliminated the effect of mode differences. To examine the competitiveness of the marketing. In all. but a number of variables. Furthermore. retail outlet and brand representation. its situation in the Greater Vancouver Regional District placed it in the category of a Group A market. Process Overview As illustrated in part A. Suncor Inc. the gross marketing 1 Although White Rock is clearly not a major centre by itself.

rack price. to arrive at “blended” values2.margin is stripped of its freight component. and freight were successively removed from the pump price. average pump prices are higher than actual average regular gasoline prices. The gross product margin thus serves as an interim basis for comparing study markets. in addition to operating cost and ancillary revenue data gathered in the study1. including some smaller centres. Group B (smaller market) and 19-market study averages. Using the derived gross product margins and volumes for each market. 1995 average values were determined for pump price. by product grade. tax content. weighted by sales demand. these were weighted by volume. 2 Accordingly. this study postulates that average outlet throughput in each market may be a significant factor affecting margins and prices. rack price. MJ ERVIN & ASSOCIATES 40 . Values were weighted by market population using 1991 Statistics Canada census data in order to determine Group A (major urban). 2. and the final “rationalized” gross product margin was determined for each market. Process Description Figure 17 shows an overview of the process used to reduce the study market 1995 pump prices into its sub-elements: Figure 17: Study Market Methodology PUMP PRICE 1 EX-TAX PUMP PRICE RACK PRICE CRUDE PRICE FREIGHT TAX OUTLET VOLUME 3 PRODUCT MARGIN 5 REFINER MARGIN UPSTREAM 2 6 7 DEALER PROFIT MARKETING COSTS MARKETING PROFIT ANCILLARY REVENUE PETROLEUM REVENUE PER OUTLET OUTLET COSTS 4 PETROLEUM REVENUE PER OUTLET CONSOLIDATED NET INCOME PER OUTLET OUTLET COSTS 1. the study postulates that outlet operating costs and revenues from ancillary sources (such as convenience store sales) might affect how the dealer establishes competitive pump prices. average outlet annual throughput was determined for each market. For each market. This allows for an accurate determination of net outlet revenue. 3. Where differences in gross product margin might still exist. 1 Although outlet cost and ancillary revenue data was not available for all markets. and freight. From participant company supplied data. Where applicable. as the “blended” price includes other product grades. a market-by-market profile of outlet income is presented. a broad representation of markets was possible. to derive the 1995 average gross product margin for each of the study markets. Finally. Gross product margins are therefore compared to corresponding volumes to determine if a cause-and-effect relationship exists. The variables of tax content.

these 19 markets represent a combined population base of 8. and gross product margins are therefore likely to be understated. Use of Rack Price The derived value of retail gross product margin is essentially based upon two price points: pump price and rack price.4. This variation is constant across all nineteen markets however. This value was then applied to the gross product margin to determine average outlet petroleum revenue. A dollar-per-outlet estimate of these elements was made. and therefore where assumptions were made. objective data exist for both of these values. grade differentials were based on known differentials of nearby markets. average revenues from ancillary services were added. The derived weighted average values of pump price.. From participant company data. it is important to understand that the use of rack price in this analysis has certain implications. but they are relatively minor. 5. and accordingly represent a broad spectrum of consumers and marketers.. Bloomberg rack price values were used as the assumed wholesale price. MJ ERVIN & ASSOCIATES 41 . the rack price basis results in petroleum revenues which are understated to a somewhat greater degree in high throughput markets than they are in low throughput markets. product margins. Also. These differentials do vary from one market to another. and supplier profit. Since actual wholesale prices (using transfer or contract prices) are not available in the public domain.7 million. marketing margin. or consolidated net incomes. In referring to marketing margins. the Bloomberg rack price is used as the defining wholesale price point which differentiates between the refiner and marketing sectors. accurate comparisons are possible. perhaps by 1 to 2 cents per litre. .to determine average consolidated net revenue per outlet. including relatively smaller ones such as Sioux Lookout or Gaspé. a recognized source of data on world crude oil and petroleum markets and prices. Interpretation of Data In some smaller centres. encompassing a significant portion of the entire Canadian market. While clear. Rack prices used in this study are taken from Bloomberg Oil Buyers’ Guide™. 6. and from one brand to another. the effect on the “blended price” is small. many wholesale petroleum purchases are made at less than the “posted” rack price. petroleum revenues.. Supplier Overhead costs. The resultant consolidated net revenue per outlet was examined in terms of its component elements of Dealer Income. represent a broad range of markets. so that on a cents-per-litre basis.. etc.. When these margins are applied to outlet throughputs as in step 4 above. also considering that RUL constitutes the majority of product. as described on page 10. and outlet operating costs were deducted from total revenue. Unlike retail pump prices however. 7. freight. Wholesale refined product prices used in this study are therefore likely to be overstated.

64 cents per litre in pump price. there is little to suggest why such a high variance exists. The 19-market study group exhibited a statistical variance1 of 17. A 6. Figure 18: 1995 Average "Blended" Pump Price 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ Price per Litre 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River On the basis of posted pump prices. The data shows a statistical pump price variance of over 17 cents per litre within this study group. but a variance of only 12.38 cents per litre in ex-tax pump price. The first of these variables to be examined is tax. table J for an explanation of how variance is derived. Several variables beyond the control of the retail gasoline sector are incorporated into the pump price however. The study data suggests that variations in tax rates account for a significant part of pump price differences. The data also shows that typically. and based on objective. and these tend to interfere with an objective comparison of fundamental competitive differences which may exist. Study Market Findings Posted Pump Price Figure 18 shows 1995 average retail pump price (using a “blend” of gasoline and diesel grades) for each of the 19 study markets.Rack prices used in this study are nevertheless market-driven. MJ ERVIN & ASSOCIATES 42 . accurate. independently gathered data. while lower prices tended to prevail in major centres. broken into tax and extax components. Tax Figure 19 shows posted pump prices for the study markets.8 cent difference in pump price 1 See footnote at Appendix II. higher priced markets are associated with smaller population centres.

GST content can vary by market. Upstream and Gross Refiner Margins Although the deduction of tax content is useful. accounting for roughly half of the average retail price. MJ ERVIN & ASSOCIATES 43 .tax. ex-tax elements 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ Cents per litre 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River 95 Blended Tax 95 Blended Extax Price Finding 16: Provincial differences in product taxation are a predominant cause of inter-regional pump price differences.75 cents per litre (Vancouver. taxes were a significant element of pump price. In all study markets. 1 Due to pump price differences. Montreal). Average 1995 taxation within the study group ranged from 22 cents per litre (Nanton) to 28. when examined on an ex-tax basis. The data shows that taxation between markets within the same province varies little.less than one-half cent per litre. thus providing a better basis for comparison. provincial tax rates can vary greatly. while taxation between provinces is more pronounced .while all markets are subject to the same rate of federal excise tax and GST1. was less than three cents. namely the upstream industry and refiner sector. This eliminates any effect that tax variability may have. it is therefore more useful to use ex-tax pump prices when comparing any two markets. Figure 19: Pump Price . or when examining historical price trends. additional elements of the revenue stream must be further isolated.between Calgary and Vancouver for example. As this study seeks to isolate the marketing or “rack to retail” sector as a competitive entity. the resultant ex-tax pump price nevertheless represents a gross margin for the entire oil industry. Since the level of taxation is clearly a factor which is beyond the control of the petroleum industry. as described in part A. but the variance is minimal .

MJ ERVIN & ASSOCIATES Cents per litre 44 . reflecting some differences in refinery crude acquisition costs. reflecting the reality that at the rack level of competition. and therefore are best analyzed separately. rack and pump prices. as this would cause rack buyers to bring product in from the lower-priced region . Figure 20 shows ex-tax pump price isolated into its upstream/refiner (ie. it should be restated that each of these sectors. The figure shows that combined gross Refiner/upstream margins are relatively uniform among the study group. Furthermore. the resultant gross marketing margin represents that portion of the pump price model which relates solely to the retail marketing sector.assuming transport costs did not outweigh the price difference. and their respective margins. Figure 20: Ex-Tax Pump Price Elements 40¢ 95 Retail Marketing Margin 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River 95 Blended Rack Price As many petroleum marketers are also involved in crude oil production and product refining. To address this.Since the refiner’s rack price incorporates the raw material cost (crude price) plus the “value-added” element of refining. the rack price is equivalent to the upstream margin plus the refiner’s margin. Freight costs are additional. but ultimately. It can also be seen that upstream/refiner margins for remotely located markets such as Thompson MB. rack price) and gross marketing margin elements. This is due to the fact that for any market. the validity of analyzing gross marketing margins in isolation might be raised. are clearly delineated by market-driven crude. in the case of Thompson). When rack price is deducted from the ex-tax pump price. the dynamics of (marketing) retail pump prices are quite distinct from those of (refiner) rack prices. one region cannot maintain rack prices at a higher level than another. the rack price is set at the rack point (Winnipeg. if a clear understanding is to be achieved. differ little from those of major centres. as is examined below.

Gross Marketing Margin and Freight Cost The gross marketing margin provides for a useful comparison of revenue streams available to the retail gasoline marketing sector. with their component freight costs. and therefore a significant pump price factor.16 cents per litre (gross marketing margin) to 7.0 cents per litre. in fact. Two of the study markets had freight costs in excess of 3. it is therefore important to eliminate the freight variable from the gross marketing margin. Figure 21: Gross Marketing Margin Elements 20¢ 15¢ Freight Cost 95 Retail Product Margin 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River Elimination of the freight variable reduced the study group’s statistical variance from 13. Figure 21 shows a study market comparison of gross marketing margins. particularly in comparisons of major urban markets to small. the data shows that freight is often a significant part of the gross marketing margin.49 cents per litre (gross product margin).3 cents per litre. Before using this as an analytical tool however. remote population centres. It is axiomatic that remote markets incur higher freight costs than those located close to the source of supply. generally smaller markets. Finding 17: Market-specific differences in product freight are a key factor in inter-market ex-tax pump price differences. as low as 0. To provide a comparative view of the marketing dynamics within the study group. this freight cost is almost negligible. it is essentially a “non-core” business. For markets which are also established as rack points. MJ ERVIN & ASSOCIATES 45 . resulting in comparative gross product margins. most Canadian marketers contract out at least some of its product distribution needs to third party cartage companies. Although freight operations are often an integral part of many petroleum marketing operations. one final outside variable must be isolated: that of product freight. For other.

5 cents).42 cents per litre. to the resultant retail gross product margin . whereas the study market result cited here incorporates all gasoline grades and a broad variety of population centres. which suggests that there may be an additional factor which is responsible for pump price 1 This is considerably more than the 3. product margins.17 cents per litre. Group A (larger population) markets averaged 5.95 cents per litre. The study revealed that: • • Retail gross product margins differ very little between major urban markets .6 cents) to the variance in their component gross product margins (7. was the lowest.22 cents per litre Smaller markets showed a wider variance in gross product margin .5 cent variance in gross product margin is still significant however. was the highest of the study group.5 cents per litre average Gross Product Margin cited in Part B.the gross revenue available to the petroleum marketing sector for its operations. In referring to marketing margins.6. 1995 gross product margin averaged 5. at 3.5 cent per litre average relates to regular gasoline in major markets.Retail Gross Product Margin Figure 22 provides a comparison of the original pump price for each study market.a variance of only 2. while Toronto. Figure 22: Petroleum Gross Product Margins 70¢ 60¢ 95 Retail Product Margin 95 Blended Pump Price 50¢ 40¢ 30¢ 20¢ 10¢ 0¢ Victoria Vancouver White Rock Winnipeg Calgary Nanton Regina Toronto Ottawa Sioux Lookout Chicoutimi Saint John Thompson Peace River Montreal Halifax Gaspé Sault Ste Marie Charlottetown When comparing the variance in pump prices within the 19-market study group (17. as the 3.06 cents per litre.68 cents per litre. MJ ERVIN & ASSOCIATES 46 .68 cents per litre1. petroleum revenues. For all study markets. A 7. or consolidated net incomes. Gaspé. while Group B markets averaged 7. Bloomberg rack price values were used as the assumed wholesale price. or between any two regions. at 14. it is evident that the non-industry factors of taxation and freight cost are partly responsible for pump price differences between any two markets.

To understand why such a wide range of margins can exist after eliminating all tax and freight variables.000 litres per year (Sioux Lookout) to over 5.000. an examination of related outlet throughput volumes is necessary.000. Figure 23 shows a similarly wide range of variability in average throughput per retail outlet within these same markets. for example. sold significantly less than 5 million litres of petroleum per year.000.000.000 Litres 3. Indeed. 3.000 5.14. If these two factors are related to each other as they are in Figure 24. it would likely be so unprofitable as to be un-viable.000 0 Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River Relationship of Gross Product Margin to Outlet Throughput Figure 22 shows that.000 1. A wide range of volume performance is evident. Outlet Throughput Figure 23 shows average annual outlet throughput (sales volume) for the study group.000 litres per year (Toronto). a distinct relationship between product margin and outlet throughput emerges: MJ ERVIN & ASSOCIATES 47 .000.000 2.000.differences between markets. ranging from under 700.1 cents per litre in Toronto. a wide range of variability still exists between markets in the study group . once isolating retail gross product margin from all of the “outside” pump price factors.000 4. vs.2 cents per litre in Gaspé. This study’s data shows that the range of volume performance among outlets within a given market is relatively narrow. if any retail gasoline outlet located in the Toronto area for example.000. Figure 23: Average Annual Throughput per Outlet 6.

If all outlets in a given market experience generally low throughputs. Gross Product Margin 18¢ Peace River Thompson Chicoutimi Saint John Charlottetown Victoria Vancouver White Rock Calgary Regina Winnipeg Ottawa Sault Ste Marie 16¢ 14¢ 12¢ Gaspé Sioux Lookout 10¢ 8¢ 6¢ Nanton 4¢ Toronto 2¢ y = -4.42 cents) than smaller (Group B) population centres (7. Ontario. and the higher prices (and margins) generally seen in these markets were a function of poor volume performance. compared to 2.7 million respectively.Figure 24: Outlet Volume vs. Smaller markets perform as competitively as larger centres.6634Ln(x) + 76.4 million litres annually.000.000 3. the 19 study markets exhibit a high degree of uniformity of gross product margin as a function of outlet throughput.962 R2 = 0.000 5.000 6. With few exceptions. while those with high Gross Product Margins tend to have low outlet throughputs.000 Halifax Montreal 0¢ That such a relationship would exist is understandable: with the same margin. On average however.that is.000 Volume (litres) 4.000.95 cents). It can be seen from Figure 25 that major centres (Group A) generally experience smaller retail gross product margins (5. an outlet with low throughput would derive less petroleum revenue than a high-volume outlet. it follows that higher gross product margins will be the consequence.000.a low volume outlet would be much less profitable than one in the same market with significantly higher volumes. This analysis of outlet throughput and gross product margin by market leads to one of the more significant findings of the study: Finding 18: After accounting for differences in taxation and freight the remaining difference in retail pump prices between markets is very closely linked to market differences in average sales volumes such that markets with low Gross Product Margins are associated with high outlet throughput volumes. Regionally.000. they remain essentially the same regardless of volume changes . and Quebec/Atlantic) exhibit a close adherence to expected margins based on throughput.000.6624 1. all market groups (BC/Prairie. As most outlet operating cost are fixed in nature .000. Although MJ ERVIN & ASSOCIATES 48 .000 2. not of poor competition. the Group A market outlets had roughly 50% more throughput than Group B outlets .

and the resultant consolidated net revenue. supplement their incomes with other revenues. Figure 26 summarizes total outlet petroleum sales.000 5. In reality. These additional factors clearly have an effect on the relative competitiveness of retail markets. Consolidated net revenue is the result of combining gross petroleum revenue (gross product margin times throughput) plus ancillary revenue (excluding cost of merchandise).000 6.000. which for the study group. car wash. while operating costs are those costs which are directly incurred in the operation of the retail facility.000 3. less outlet costs. ancillary sales. and ultimately shows that very little difference in competitiveness exists between any two markets.000. Ancillary revenues are those derived from non-petroleum sales sources. outlet-based view of retail markets.000 2. in addition to petroleum sales. is only a measure of petroleum revenue per litre. as described below. however. competitiveness occurs between retail outlets.Quebec/Atlantic markets appear to experience higher margins (and smaller throughputs) than other regions. supplier overhead costs. and incur many expenses in the course of their commerce. two additional factors are introduced: ancillary revenue and outlet operating costs. Consolidated Net Revenue per Outlet To create a complete.the revenue available for dealer income. and must be examined.000 4. and supplier MJ ERVIN & ASSOCIATES 49 . product cost. such as convenience stores.716 .Regional & Urban Groupings 18¢ 16¢ 14¢ 12¢ 10¢ 8¢ Group B markets QU/AT markets BC/PR markets Group A markets Ontario markets All study markets 6¢ 4¢ 2¢ 0¢ 1.000. and auto service.000. averaged $69. Gross product margin. which. It represents the residual revenue which is available to the dealer and to the supplier.000 Volume (litres) The examination of gross product margin as a function of outlet throughput provides a comprehensive and objective rationalization of inter-market pump price differences. this is likely due to the higher incidence of Group B study markets within this region.000.000. Figure 25: Outlet / Volume Relationship .

as explained below. A discussion of the ultimate distribution of this revenue is useful. Income BC/PR $300. Costs. petroleum sales revenues alone were insufficient to cover operating costs for the 481 individual outlets studied.000 $100.000) 1: Net Retail Petroleum Revenue 2: Ancillary Revenue 3: Outlet Costs 4: 95 Consolidated Retail Outlet Income The findings depict that some inter-regional differences in outlet net revenue exist. Figure 26: Outlet Revenues. and his personal labour investment. Although outlets in smaller (Group B) markets had higher outlet consolidated net revenues than major market outlets . Most markets showed relatively similar net revenues (see Appendix II. these ancillary operations contributed to a lower product margin and consequently.000) $(250.000 per year respectively . An examination of these component elements reveals a significant finding: that for most markets. $60.000 $($80) ON QU/AT Group A Group B All Study Mkts $(50.000 $200. causing the weighted average for Quebec / Atlantic to be depressed).000 $250. petroleum revenues alone are insufficient to offset the operating expenses associated with retail petroleum outlets. Table K).000) $(350.000) $(300. Dealer and Supplier Profitability Consolidated net revenue represents the source of cash flow for three distinct purposes: • dealer income/profit: the return or salary to the dealer. although these differences are somewhat overstated (market data for Montreal showed particularly low net revenue.000 vs. which reflects his investment in the outlet.profits. In effect. reduced pump prices.000 $50.Group B outlets were not as profitable as these revenue values might suggest. The study average retail gasoline outlet would have experienced a net loss without the contribution of ancillary operations. As described above.$154. consolidated net revenue is the residual revenue which is available to the dealer and to the supplier. MJ ERVIN & ASSOCIATES 50 . Finding 19: Based on published rack prices.000) $(200.000) $(100.000) $(150.000 $150.

supplier overhead: all operating costs of the supplier that are not directly associated with a single outlet. These costs would include salaries of marketing representatives and management, brand advertising, corporate charity, sales processing, head office and regional office overheads, etc.. supplier profit: after the above costs are allocated, the residual revenue is available as profit to be re-invested into retail operations, and/or distributed to shareholders.

Although ideally, this study would quantify each of these values, there are no clear, objective means to do so. In particular, the measurement and subsequent allocation of supplier overhead costs on an outlet-by-outlet basis is an inexact science, at best. This study therefore provides an estimate of these values, as shown in Table 4.

Table 4: Estimated Cash Flow from Consolidated Net Revenue
All Study Market Avg. Consolidated Revenue (data supported) comprised of (estimated): Dealer Income Supplier non-outlet Overhead Supplier Residual Profit $32,000 $52,000 $(14,000) 0 to $60,000 $30,000 to $70,000 $(30,000) to $150,000 $70,000 Estimated Range ($15,000) to $220,000

note Supplier overhead estimates are based on MJ Ervin & Associates research data not directly related to this study.

Despite the fact that these table values are estimates, the values, and the supplier residual profits in particular, are believed to be a reasonable assessment of the state of retail profitability in Canadian retail petroleum markets. Accordingly, in 1995, a typical retail outlet is estimated to have returned a net loss to the supplier in the order of $14,000, using Bloomberg rack prices as the cost basis. Finding 20: For the 481 individual outlets studied, after the average 1995 outlet revenues were distributed to meet dealer income and the supplier’s marketing overhead requirements, the residual represented a net loss to the supplier. Taking into account the possible discounts from posted rack prices and independent brands’ lower marketing overheads, residuals for outlets not studied may be better. This may contradict other indications that 1995 in fact may have represented a profitable year for Canada’s major oil companies. This was unlikely to be as a result of retail marketing operations, however, and was more likely a result of other operations including upstream, refining, or petrochemicals. Also, non-refiner marketers, who did not contribute to the study database, may have realized somewhat better profitabilities than indicated here: it is likely that their dealer costs and supplier overheads are less than those of major oil companies. Nevertheless, this data illustrates an important finding:

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Finding 21: Based on published rack prices and the individual outlet data, the profitability of the 481 outlets studied appears only marginal. The viability of the Canadian retail gasoline sector as a whole may be somewhat better, given the possibility of discounts from posted rack prices and potentially lower overhead costs. Unlike the major market outlets, rural market outlets used in this study appeared to be somewhat more profitable. This may not be representative of rural outlets in general, however, since the 11 Group B markets were chosen for this study for some particular criteria, not necessarily to be “typical” small-population markets.

Market by Market Competitive Analysis
This section of the study provides a detailed market-by-market analysis of the 19 study markets for the purpose of illustrating some competitive dynamics that may exist in retail gasoline markets.

Explanation of Format
Each market commentary begins with a demographic overview as shown below, providing values and rankings for a number of parameters: • • • • • population - taken from 1991 census data, this is the population of the greater metropolitan area (census district) of each municipality. # of brands - number of brands, as reported by study participants. # of outlets - estimated number of outlets, as reported by study participants. outlets per 10,000 - number of retail outlets per 10,000 population. avg outlet volume/yr - average outlet annual throughput, based on participantprovided outlet data. Total market volume and total outlets were not used to derive this measure, as they are estimates only. 95 mktg mrgn - gross marketing margin, as defined in part A of this study. freight - freight cost per litre associated with transporting petroleum from the rack point to a typical outlet in the market. 95 prod mrgn - gross product margin, as defined in part A of this study. rank or rank* - ranking of the value within the range of study group values. Where an asterisk appears (*), rankings are lowest value = 1, otherwise highest value = 1. sample size - the number of retail outlets for which data was collected in this market.

• • • •

Where sufficient data exists, a historical record of relevant prices is shown in graphical form.

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Victoria
population # of brands # of outlets outlets per 10,000 299,550 12 106 3.54 rank 8 rank 9 rank 8 rank* 6 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3,223,068 litres 6.89 ¢ 0.41 ¢ 6.48 ¢ rank 9 rank* 7 rank* 10 rank* 7

sample size 26

General: Victoria is a relatively major market, and its location on Vancouver Island presents some uniqueness with respect to supply. Geographic / Supply / Freight cost considerations: As Vancouver Island has no refinery, Victoria depends upon marine supply from the Vancouver mainland, or potentially from any marine source of supply in the Pacific Rim. This broad access to supply has occasionally allowed some marketers to purchase “spot” gasoline at relatively low rack prices, creating a short-term drop in pump prices. In the past several years, the rack market across Canada has grown more robust, such that all Canadian rack prices now follow those in the US very closely, and most Canadian markets now benefit from the same type of cross-border rack competition that Victoria had experienced. Influence of other markets: Due to its geography, consumers in this market are somewhat “captive” to the local retail gasoline marketers: no opportunity exists to drive to other markets to purchase retail gasoline on a casual basis. This had no apparent effect on the level of competition or price levels however, as described below. Price history / Taxation: Pump prices have historically been quite volatile, often at times when other markets have been quite stable, as described above. Victoria collects a 1.5 cents per litre municipal tax. Ex-tax pump prices are on average, very close to the Canadian 10city average. Margin/Throughput relationship (Figure 24): Victoria fell within a cluster of markets with similar margin/throughput relationships. Product margin was marginally less than expected for a market with these throughput characteristics. Consolidated net revenue: No ancillary or outlet cost data was available.

Figure 27: Victoria - Price History
60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢
Crude Oil Price Vancouver Rack Price Victoria Posted Price - ex tax Canada Average - extax Victoria Posted Pump Price RUL Canadian Average Posted Pump Price

10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Jan-92 Jan-93 Jan-94 Jan-95 Oct-95 Jan-96 Jul-92 Jul-93 Jul-94 Jul-95

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98 ¢ 0. ranking 11th. Vancouver provides several perspectives into retail marketing. Geographic / Supply / Freight cost considerations: As a port city. Overall. and with access to wholesale product by several means. Low consolidated net revenues may have contributed to the higher margin. Vancouver collects a 4 cent per litre municipal tax. a 60. net outlet revenues were less than those of other major centres.000 barrel per day plant located in the greater Vancouver area. Vancouver is also a terminal for a refined products pipeline from Edmonton.89 rank 3 rank 5 rank 3 rank* 2 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3.Price History 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Apr-93 Apr-94 Apr-95 Apr-96 Oct-92 Oct-93 Oct-94 Oct-95 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Vancouver Rack Price Vancouver Posted Price . The somewhat high margin placed this market slightly above.extax Canadian Average Posted Pump Price Vancouver Posted Pump Price RUL MJ ERVIN & ASSOCIATES 54 .38 ¢ 7. as described below. while average throughput ranked 4th. but well within a cluster of markets with similar throughputs. This may explain the somewhat elevated gross product margin in this market. Figure 28: Vancouver .ex tax Canada Average .60 ¢ rank 4 rank* 9 rank* 9 rank* 11 sample size 37 General: As one of Canada’s major retail markets.000 1. Consolidated net revenue: Vancouver outlets averaged the highest in both ancillary revenue and outlet operating costs.542. Margin/Throughput relationship (Figure 24): Gross product margin was slightly high. Influence of other markets: Although relatively close to the US border.658.968 litres 7. and also has local refining capacity. Price history / Taxation: Pump and ex-tax prices have historically been somewhat higher than the Canadian 10-city average.745 18 446 2. this market has access to numerous refiners along the Pacific coast through marine supply.Vancouver population # of brands # of outlets outlets per 10. contributing to a higher than average pump price. driving distances preclude most Vancouver consumers from routinely accessing this neighboring market.

the study data found little to suggest a material effect upon representation.45 ¢ 7. White Rock’s margin was typical of markets with similar outlet throughputs. This market is close to its usual rack point. This is likely due to the fact that unlike many smaller markets. gasoline “cross-border shopping” is less pronounced than might be expected. and retail gross product margin was less than that of markets with a similar population base.000 16. This suggests that. Price history / Taxation: Although no specific data is available.53 ¢ rank 5 rank* 9 rank* 12 rank* 10 sample size 5 General: White Rock is situated on the lower mainland of BC. price/competitive dynamics appeared to relate more to the influence of Vancouver than to any cross-border factors. The reality may be that the immediate necessity of filling one’s gas tank may often preclude a cross-border trip.98 ¢ 0. at least in this market.90 rank 14 rank 17 rank 14 rank* 13 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. due to its proximity to one.315 4 8 4. thus providing some unique characteristics for the market study.604. In all respects. White Rock is essentially part of a major market due to its proximity to Vancouver. Like Vancouver. Consolidated net revenue: No Ancillary or outlet cost data was available for this market.630 litres 7. MJ ERVIN & ASSOCIATES 55 . adjacent to the United States border. this market is subject to a 4 cent per litre municipal tax. Average outlet throughputs were relatively high. Margin/Throughput relationship (Figure 24): gross product margin was virtually identical to that of Vancouver. Geographic / Supply / Freight cost considerations:. Influence of other markets: Although this market is a border-crossing community. but less than most markets with a small population base. Freight costs were accordingly low compared to other small markets in this study. Despite its relatively small size. or competitive dynamics. Vancouver. prices.White Rock population # of brands # of outlets outlets per 10. prices in this market have historically mirrored those of Vancouver. the White Rock retail gasoline market displayed the same attributes as a major urban market.

24 ¢ 6. Calgary is of sufficient size to support a viable rack market.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Calgary Rack Price Calgary Posted Price . Calgary pump prices are very close to the Canadian average. Some smaller markets in the vicinity have occasionally priced below Calgary. which was one reason for selecting Calgary as a study market.23 ¢ rank 3 rank* 6 rank* 3 rank* 6 sample size 69 General: Alberta enjoys the lowest provincial product tax rates in Canada. Price history / Taxation: As the figure below shows. Consolidated net revenue: was typical of other major markets in the study group.extax Calgary Posted Pump Price RUL Canadian Average Posted Pump Price MJ ERVIN & ASSOCIATES 56 . Margin/Throughput relationship (Figure 24): Gross product margin was very typical of other study markets with similar throughput characteristics. Figure 29: Calgary . Influence of other markets: Calgary is fairly remote from US and other major markets. Other considerations: Of the markets studied.ex tax Canada Average . Calgary had the third highest number of retail brands. on some occasions the Calgary ex-tax RUL pump price has dropped to within one cent per litre of rack price. Rack-to-outlet freight costs are among the lowest in the study group.827.675 27 313 4. indicative of a strong competitive climate. Geographic / Supply / Freight cost considerations: Although there is no refining capability within this market. This trend is largely due to a low provincial tax rate: when compared on an ex-tax basis.719 litres 6. Indeed.47 ¢ 0. Product is usually sourced from Edmonton refineries via pipeline.4 rank 4 rank 3 rank 4 rank* 9 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3.000 710.Calgary population # of brands # of outlets outlets per 10. pump prices in this market have historically been well below the Canadian 10-city average. creating some competitive pressures (see Nanton).

Margin/Throughput relationship (Figure 24): Although gross product margin was high relative to major markets.80 rank 9 rank 7 rank 10 rank* 10 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. reflecting a somewhat higher than average gross product margin relative to the 10-city weighted average. Freight costs were therefore low: Regina ranked first (least) in freight costs among the entire study group. supply/demand is likely more balanced.089.29 ¢ rank 10 rank* 8 rank* 1 rank* 8 sample size 30 General: With local refining capacity.ex tax Canada Average . which are among the highest in Canada. and is therefore a recognized rack pricing point. it is likely that this reflected a surplus of wholesale inventory within the local market or region.000 179. Ex-tax prices are also above average. and this market is now more typical of other large population centres.180 15 86 4. This is partly due to provincial taxation levels. Influence of other markets: Like Calgary. Regina was of some interest as a study market.Price History 65¢ Regina Posted Pump Price RUL 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ Crude Oil Price Regina Rack Price Regina Posted Price . Price history / Taxation: In the early 1990’s this market experienced frequent and pronounced price war activity.794 litres 7. and a history of volatile pump prices.Regina population # of brands # of outlets outlets per 10. Although no supporting data is available.21 ¢ 7.extax Canadian Average Posted Pump Price 10¢ 5¢ Apr-92 Apr-93 Apr-94 Apr-95 Apr-96 Oct-92 Oct-93 Oct-94 Oct-95 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 MJ ERVIN & ASSOCIATES 57 . this market has generally exhibited pump prices which are somewhat higher than the Canada 10-city average.50 ¢ 0. and therefore experiences no particular influences from any other major market. Since then. Geographic / Supply / Freight cost considerations: Regina possesses its own refining capacity. Figure 30: Regina . Since 1993. price volatility has eased. margins and throughputs were typical of other markets with a similar population base. Consolidated net revenue: was typical of other similar markets. this market is removed from other significant markets.

and therefore experiences no particular influences from any other major market. and has remained very close to the Canadian 10-city average.Winnipeg population # of brands # of outlets outlets per 10. this market is removed from other significant markets. Price history / Taxation: In the early 1990’s this market experienced some price war activity. although there is no study data to support this.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Winnipeg Rack Price Winnipeg Posted Pump Price RUL Winnipeg Posted Price . Since then.06 ¢ 0. Geographic / Supply / Freight cost considerations: No refining capacity exists within the Winnipeg market.790 17 261 4.22 ¢ 7.23 rank 6 rank 6 rank 5 rank* 8 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. This may reflect a lower than average Consolidated Net Income. like most markets of this population density.extax Canadian Average Posted Pump Price MJ ERVIN & ASSOCIATES 58 .ex tax Canada Average . though somewhat higher than average ex-tax pump prices. possibly due to modest ancillary revenue. On an ex-tax basis. probably related to a regional surplus of wholesale inventory (see Regina). it is an established rack price point. this market has exhibited relatively stable pricing.84 ¢ rank 8 rank* 11 rank* 2 rank* 12 sample size 61 General: The Winnipeg market is characterized by stable.000 616. Consolidated net revenue: No ancillary or outlet cost data was available for this market.265. Figure 31: Winnipeg .217 litres 8. although. Margin/Throughput relationship (Figure 24): Winnipeg fell within a cluster of markets exhibiting similar margins relative to their throughputs. prices have tended to stay somewhat above the Canadian average. Influence of other markets: Like Calgary.

41 ¢ 5. in order to maintain a share of the considerable potential sales revenue that passes through this market. Consolidated net revenue: No Ancillary or cost data was available. in terms of expected petroleum revenues. Average outlet throughputs were relatively low. a feature not available to other.Nanton. Its setting on a major highway provides a significant opportunity for attracting highway motorist volume. MJ ERVIN & ASSOCIATES 59 .55 rank 19 rank 17 rank 18 rank* 19 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. This strategy has had the effect of sustaining a roughly 10 million litre per year retail gasoline market .91 ¢ 0. Despite its small size. In this respect. Due to its highway location and its proximity to Calgary. Price history / Taxation: In order to attract market share beyond simply the local population. and perhaps healthy ancillary sales associated with highway traffic. Margin/Throughput relationship (Figure 24): Like some other small markets in the study group. Nanton appeared to benchmark its pump prices to those of Calgary.600.and a low average outlet throughput.071. due to its proximity to one. Geographic / Supply / Freight cost considerations: Located within an hour’s drive of the Calgary rack.51 ¢ rank 15 rank* 3 rank* 10 rank* 3 sample size 2 General: Nanton is a farming community approximately 70 km south of Calgary.far in excess of what would be expected of a community with a population of 1. this market has a relatively low freight overhead. While these conditions would normally result in a high gross product margin. Influence of other markets:.000 litres 5. Nanton had the second lowest gross product margin of the study group. Some unique characteristics of this market serve to illustrate why some smaller markets experience relatively low pump prices. would have an offsetting effect.the highest of the entire group . While the margin data might suggest that retail gasoline operations in Nanton would not be profitable. Nanton has traditionally priced either at or below Calgary. situated on a major North-South highway to the United States Among the study group. Unlike many of the smaller markets in this study group. more isolated small-town markets. the retail gasoline market in Nanton was not restricted to the local population. placing Nanton well below the expected margin. the Nanton retail gasoline market displayed the same price attributes as a major urban market. although not as low as expected. Alberta population # of brands # of outlets outlets per 10.585 4 5 31.000 1. Nanton was the smallest market in terms of population. Nanton was perhaps the least viable market in the study group. Nanton had a high number of per capita outlets . while others experience consistently high prices. it is likely that low operating costs. as Figure 24 shows.

and due to its isolated locale in northern Alberta. MJ ERVIN & ASSOCIATES 60 . Margin/Throughput relationship (Figure 24): Although gross product margins in this market were relatively high. further adding to overall high pump prices. and was accordingly chosen as a study market.715 6 8 11. nor is it influenced by.623 litres 12. Peace River has among the highest freight cost in the study group. isolated markets. and in fact fell into a tight cluster of four other study markets. Consolidated net revenue: No Ancillary or outlet cost data was available for this market.6 ¢ 10. this market has little or no influence upon. they were comparable to other markets with similar average throughputs. Influence of other markets: Since it is not located on a major inter-urban thoroughfare. experiencing relatively high gross product margin and consequently.45 ¢ 1.6 cents per litre. In contrast to Nanton.000 6. though fairly typical of many smaller. Peace River also experiences high freight costs. other markets. high pump prices. the community of Peace River is subjected to a number of factors which give rise to higher than average prices.157.91 rank 17 rank 13 rank 14 rank* 17 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. Alberta population # of brands # of outlets outlets per 10. its normal rack point. Price history / Taxation: Peace River is typical of small. Geographic / Supply / Freight cost considerations: At 1. Supply is via tanker truck from Edmonton.Peace River. isolated markets.85 ¢ rank 13 rank* 16 rank* 16 rank* 15 sample size 4 General: Peace River is located at a considerable distance from the nearest source of primary supply.

Other considerations: Like other small markets. outlet costs were also modest typical of most smaller markets. further adding to overall high pump prices. this market has little or no influence upon. and reduced pump prices. they were comparable to other markets with similar average throughputs. resulting in per-outlet petroleum revenues which were quite typical of many markets. Geographic / Supply / Freight cost considerations: At 3. Supply is via tanker truck from Winnipeg. the Thompson market experiences some competitive disadvantage due to its small population base and limited market potential. Although outlets in Thompson appear to be as competitive as those of any other study market. Influence of other markets: Since is not located on a major inter-uban thoroughfare. remote market. and due to its isolated locale in northern Manitoba. This however. nor is it influenced by. Manitoba population # of brands # of outlets outlets per 10.1 ¢ 3.02 ¢ 11. thereby creating the potential for narrower margins. Margin/Throughput relationship (Figure 24): Although gross product margins in this market were relatively high. Although ancillary revenues were the smallest of the study group. the community of Thompson clearly falls into the category of a small.02 cents per litre. Thompson is among the highest freight costs in the study group. Price history / Taxation: Thompson was typical of small. would have the conflicting effect of reducing the consumer’s choice in a market with a limited choice to begin with. high pump prices. its usual rack point.014.08 ¢ rank 16 rank* 17 rank* 17 rank* 16 sample size 4 General: Like Peace River. and in fact fell into a tight cluster of four other study markets.01 rank 16 rank 15 rank 17 rank* 7 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. other markets.975 5 6 4.520 litres 14. a significant portion of which would likely be distributed towards supplier overhead costs.Thompson. MJ ERVIN & ASSOCIATES 61 . experiencing relatively high gross product margin and consequently.000 14. It also experienced high freight costs. A reduction in the number of outlets might seem to be the best way to improve outlet throughput performance. isolated markets. Consolidated net revenue: Low outlet throughputs were offset by higher margins. Thompson is faced with the dilemma. These factors resulted in relatively strong per-outlet net revenues.

478 litres 3. Influence of other markets: This market is continuously linked with several other major retail markets. stretching from Pickering to Buffalo. Within this region are thousands of retail outlets. and is also relatively close to wholesale supply sources in the US. With an average “blended” gross product margin of only 3. similar to that of Montreal. an outlet pumping significantly less than the average 5 million litres annually would not be likely to generate sufficient revenue to remain viable.06 ¢ rank 1 rank* 1 rank* 7 rank* 1 sample size 59 General: Within the study group.098. New York. It consequently has a low freight component. This is likely offset by high operating costs.3 ¢ 3. exhibiting a lower margin than even expected of an extraordinarily high average outlet throughput.ex tax Toronto Posted Pump Price Canadian Average Posted Pump Price MJ ERVIN & ASSOCIATES 62 .06 cents per litre. least number of outlets per capita. In addition. this market ranked first in a number of measures: lowest gross product margin.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Toronto Rack Price Canada Average . Figure 32: Toronto . and a resultant low consolidated net revenue. as evidenced by an exceptionally low gross product margin. this market was consistently less than the 10-city average. it had the second highest brand variety of the study group.275. thus there exists a climate of robust competition.4 rank 1 rank 2 rank 2 rank* 1 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 5. and first in average throughput per outlet. Geographic / Supply / Freight cost considerations: Toronto has nearby refining capacity. it is likely that outlet ancillary revenues are among the highest in the country. On an ex-tax basis however.775 30 546 2.extax Toronto Posted Price .000 2.36 ¢ 0. Margin/Throughput relationship (Figure 24): This market stood apart from the study group. Price history / Taxation: 1995 posted pump prices in Toronto did not differ markedly from those of other major Canadian centres.Toronto population # of brands # of outlets outlets per 10. Consolidated net revenue: Although no study data was available for this market.

Figure 33: Ottawa . slightly lower that expected. Consolidated net revenue: was low. Although petroleum revenues were typical of major markets. several smaller.29 ¢ 5.948 litres 5. and operating costs were higher than most. Price history / Taxation: Pump prices in this market were comparable to other major centres when viewed on an ex-tax basis. freight costs within this market were quite low. margins and prices in Ottawa are typical of markets with similar throughput and net revenue characteristics.ex tax Canada Average . in fact.extax Canadian Average Posted Pump Price Ottawa Posted Pump Price RUL MJ ERVIN & ASSOCIATES 63 . and close to the Canadian 10-city average.145 19 209 3.004.Ottawa population # of brands # of outlets outlets per 10. some of which have on occasion priced below Ottawa (see Nanton and Calgary).68 ¢ rank 2 rank* 4 rank* 6 rank* 4 sample size 39 General: Ottawa was very typical of major markets.08 rank 5 rank 4 rank 6 rank* 4 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 4. rural markets co-exist in this area. Influence of other markets: Although Ottawa is the only major market in the immediate area. exhibiting all of the characteristics of robust competition.000 678. ancillary revenue was slightly lower than average. Geographic / Supply / Freight cost considerations: As Ottawa is an established rack point. This would suggest that it was as competitive as any other major market of similar size and throughput characteristics. Margin/Throughput relationship (Figure 24): This market had the second highest average outlet throughput of the study group with a correspondingly low gross product margin. Other considerations: While pump prices in this market were somewhat higher than in Toronto.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Ottawa Rack Price Ottawa Posted Price .97 ¢ 0.

Sault Ste Marie fell into a cluster of 10 study markets of between 3 to 4 million litres in average annual throughput. Price history / Taxation: Ex-tax pump prices were relatively high compared to other Ontario markets. Freight costs are therefore high. This would suggest that a significant market share is being lost across the US border.000 81.Sault Ste Marie population # of brands # of outlets outlets per 10. a product of relatively strong net petroleum revenues combined with lower than average operating costs.22 ¢ 7.550 litres 8. somewhat isolated.73 ¢ 1. Influence of other markets: This market is close to a US border market. Sault Ste Marie is a sizable market. and between 5 to 8 cent per litre in gross product margin. and accordingly. Consolidated net revenue: This market showed the highest consolidated net revenue of the study group. Geographic / Supply / Freight cost considerations: Sault Ste Marie uses Toronto as its usual rack point. a consequence of the transport distance from the rack point.51 ¢ rank 6 rank* 12 rank* 15 rank* 9 sample size 12 General: While situated at some distance from its nearest source of rack supply. this Canadian market has some difficulty in remaining both competitive and viable. Margin/Throughput relationship (Figure 24): While this market had the third-lowest per capita outlet population of the study group (behind Vancouver and Toronto). MJ ERVIN & ASSOCIATES 64 . yet with some potential for cross-border retail competition.465. Pump prices in this market were thus typical of any market with similar throughput characteristics.475 10 24 2.95 rank 11 rank 10 rank 12 rank* 3 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. average throughputs were modest. partly due to higher freight costs.

one-seventh the average throughput in Toronto.2 ¢ 11. in fact the second highest in the study group.06 rank 18 rank 19 rank 19 rank* 16 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 694. MJ ERVIN & ASSOCIATES 65 . brands. Margin/Throughput relationship (Figure 24): Sioux Lookout’s gross product margin. and had the least number of outlets. Price history / Taxation: Ex-tax pump prices were relatively high compared to other Ontario markets. This would suggest that.96 ¢ 3. with little or no influence from other retail gasoline markets.000 3. and outlet throughputs of any market studied.310 3 3 9. This is a major factor in the high cost of gasoline in this market. so that virtually all sales volume represents local demand only. was much less than expected for a market of this size.76 ¢ rank 19 rank* 18 rank* 18 rank* 18 sample size 2 General: Sioux Lookout was one of the smallest markets within the study group. Freight costs are therefore high.Sioux Lookout population # of brands # of outlets outlets per 10. It therefore presents some unique characteristics for the market study.006 litres in 1995. An average outlet in Sioux Lookout pumped only 694.066 litres 14. this market experiences a high degree of price competition. Consolidated net revenue: No data was available for this market. largely due to higher freight costs. despite its high prices. Sioux Lookout is well-removed from any major highway. Geographic / Supply / Freight cost considerations: Sioux Lookout is normally supplied from the Winnipeg rack via tank truck. Influence of other markets: This is clearly an isolated market. although high.

88 rank 2 rank 1 rank 1 rank* 11 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. Figure 34: Montreal . a function of a competitive rack market and an excess of retail outlets competing for market share.13 ¢ rank 7 rank* 2 rank* 7 rank* 2 sample size 74 General: As the largest retail gasoline market in the Quebec/Atlantic region. Montreal was included in the selected market study. and is also relatively close to wholesale supply sources in the US. Consolidated net revenue: Montreal outlets had relatively poor ancillary revenues compared to the major market average. pump prices in this market have a tendency to be volatile.775.144 litres 5. Influence of other markets: Like Toronto. This. thus promoting a competitive climate.5 cents per litre was introduced into the Montreal area). Montreal nevertheless exhibited a gross product margin which was well below that expected for these throughput attributes. It therefore represents a highly competitive rack market. this market interacts with several other markets in the region. with resultant low average outlet throughputs.394. This market had the highest tax content of the study group due to high provincial tax rates (in 1996. combined with low petroleum revenues and high operating costs. Geographic / Supply / Freight cost considerations: Montreal has local refining capacity. an additional tax of 1.43 ¢ 0.extax Montreal Posted Price . Margin/Throughput relationship (Figure 24): This market would appear to be overrepresented in outlets compared to other major markets.3 ¢ 5. this market ranks first of the study group in terms of brand variety.Montreal population # of brands # of outlets outlets per 10.000 1. With 32 competing brands. pump prices in Montreal have generally been at or below the 10-city average for major markets.870 32 866 4.Price History 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Montreal Rack Price Crude Oil Price Canadian Average Posted Pump Price Canada Average . On an ex-tax basis however.ex tax Montreal Posted Pump Price MJ ERVIN & ASSOCIATES 66 . Price history / Taxation: As the figure shows. placed Montreal lowest of all study markets in terms of consolidated net revenue.

250. MJ ERVIN & ASSOCIATES 67 .Chicoutimi population # of brands # of outlets outlets per 10. for example). Chicoutimi is normally supplied from the Quebec city rack.04 rank 10 rank 8 rank 9 rank* 15 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. were quite typical of markets with similar populations. this market has little potential as a rack market. within a cluster of other markets with similar attributes. but as the figure shows. Geographic / Supply / Freight cost considerations: Although some markets of this size support a viable rack market (Saint John. Nevertheless. both pump and ex-tax prices in this market were higher than average. Margin/Throughput relationship (Figure 24): Outlet throughputs. Freight costs are therefore somewhat high.28 ¢ 1. Price history / Taxation: Chicoutimi benefited from a special Quebec tax reduction which applies to certain markets in remote areas and within 20 kilometers of the provincial border. a partial factor in the high cost of gasoline in this market. yet is geographically quite isolated.75 cents per litre.605 14 97 8. Influence of other markets: The Chicoutimi / Jonquiere market represents a sizeable population base.289 litres 12. Consolidated net revenue: was average among the study group. by tank truck. but is quite isolated from any other markets. In the case of Chicoutimi. although low. Gross product margin was accordingly high. this amounted to a reduction of 5.000 120.08 ¢ 11.2 ¢ rank 12 rank* 15 rank* 13 rank* 17 sample size 16 General: The Chicoutimi area was somewhat unique among the study markets in that there is a relatively large population base.

amounting to a reduction of 5. a product of high freight costs and gross product margins.400 6 13 4.33 ¢ 14. this margin was only slightly higher than expected for a market with these throughput attributes.Gaspé population # of brands # of outlets outlets per 10. in the case. This is a major factor in the high cost of gasoline in this market. in fact the highest in the study group.75 cents per litre. by tank truck. both pump and extax prices in this market were higher than average. a key factor contributing to its 14. Nevertheless. Gaspé is well-removed from any major highway. Nevertheless.17 gross product margin the highest of the study group. ancillary revenues would likely be modest. with little or no influence from other retail gasoline markets.900 litres 17. Geographic / Supply / Freight cost considerations: Gaspé is normally supplied from the Montreal rack. MJ ERVIN & ASSOCIATES 68 .000 16. Price history / Taxation: Gaspé benefited from a special Quebec tax reduction which applies to certain markets in remote areas and within 20 kilometers of the provincial border.17 ¢ rank 18 rank* 19 rank* 19 rank* 19 sample size 2 General: Gaspé is a relatively small market.88 rank 13 rank 13 rank 8 rank* 12 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 981. Freight costs are therefore high. located at a considerable distance from its rack source of supply.50 ¢ 3. Although operating costs are likely to be low in a small market like Gaspé. Margin/Throughput relationship (Figure 24): This market had the second-lowest outlet throughput of the study group. Influence of other markets: This is clearly an isolated market. so that virtually all sales volume represents local demand only. Consolidated net revenue: No data was available for this market.

Accordingly. with or without a local refinery. the Saint John retail market is relatively isolated from other retail markets of any significance. In fact. That a major refinery resides in this market might suggest that these prices should be among the least in the country.79 ¢ 0.ex tax Canada Average .27 ¢ 9. The only real benefit that a local refinery provides is the modest rack-to-outlet freight cost factor. Geographic / Supply / Freight cost considerations: Saint John is home to a large regional refiner.52 ¢ rank 14 rank* 13 rank* 4 rank* 13 sample size 17 General: As a major refining centre in Atlantic Canada. Margin/Throughput relationship (Figure 24): Saint John is somewhat over-represented by retail outlets.Saint John NB population # of brands # of outlets outlets per 10. Consolidated net revenue: was average for the study group. Since provincial taxes are among the lowest in the country. retail pump prices are ultimately a reflection of rack prices. reflected in the high ex-tax pump price.095. it is an established rack point. which for Saint John. Average gross product margin was consequently high.extax MJ ERVIN & ASSOCIATES 69 . and is capable of shipping and receiving wholesale product through marine facilities. ex-tax prices were relatively high. Saint John presents some unique characteristics for the market study. posted pump prices in the Saint John market have closely followed the 10-city average. freight costs in this market are low. Figure 35: Saint John NB . Nevertheless.47 rank 12 rank 11 rank 11 rank* 14 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. this market fell within the expected range of gross product margins as a function of outlet throughput. and therefore. Influence of other markets: Although rack pricing is potentially subject to influence from other Atlantic coast terminals.000 74. do not differ markedly from any other rack point in the study group.970 9 56 7. Price history / Taxation: Historically. resulting in lower than expected average outlet throughputs.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Saint John Rack Price Canadian Average Posted Pump Price Saint John NB Posted Pump Price RUL Saint John Posted Price .694 litres 9.

Halifax
population # of brands # of outlets outlets per 10,000 330,845 9 113 3.42 rank 7 rank 11 rank 7 rank* 5 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3,058,010 litres 6.0 ¢ 0.27 ¢ 5.73 ¢ rank 11 rank* 5 rank* 4 rank* 5

sample size 18

General: As the largest population centre in Atlantic Canada, Metro Halifax was included in the selected market study. Geographic / Supply / Freight cost considerations: This market is served by a number of regional refineries, including one situated locally. Its marine port status allows for the potential import of refined product from any one of several refiners on the US east coast or western Europe. Influence of other markets: The Halifax/Dartmouth market represents a sizable population base, with a commensurate representation of retail outlets. It is relatively isolated from other retail markets of any significance. Price history / Taxation: For a number of years until mid-1991, retail pump prices, numbers and types of outlets and pump service (full vs self-serve) were regulated by that province’s Public Utilities Board (PUB). This structure was likely responsible for the historically high pump prices that existed in this market until late 1992. Since then, pump prices have generally fallen to reflect market conditions, and have on occasion, experienced price war activity, most notably in 1996, where at times, prices fell below the posted rack (wholesale) cost. Margin/Throughput relationship (Figure 24): Halifax exhibited a gross product margin well below that expected for these throughput attributes. While product margin ranked 5th lowest in the study group, outlet throughput was disproportionately low, ranking 11th. Consolidated net revenue: No data was available for this market.

Figure 36: Halifax - Price History
65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Apr-93 Apr-94 Apr-95 Apr-96 Oct-92 Oct-93 Oct-94 Oct-95 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96
Crude Oil Price Halifax Rack Price Canadian Average Posted Pump Price Halifax Posted Pump Price RUL

Halifax Posted Pump Price - ex tax Canada Average - extax

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Charlottetown
population # of brands # of outlets outlets per 10,000 15,395 5 23 14.94 rank 15 rank 15 rank 13 rank* 18 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 1,890,648 litres 11.17 ¢ 1.14 ¢ 10.03 ¢ rank 17 rank* 14 rank* 14 rank* 14

sample size 4

General: As PEI is the only province that regulates gasoline prices, Charlottetown was included in the study group to derive some insights into its possible effect on competitiveness. Geographic / Supply / Freight cost considerations: This market receives marine supply, usually from Halifax, but often from one of several marine terminals in the region, including Saint John, Quebec city or Montreal. Influence of other markets: Due to its island setting, retail consumers have little opportunity to shop adjacent markets for the lowest-priced gasoline. Price history / Taxation: Charlottetown has perhaps the consistently highest ex-tax pump price of any urban market in Canada. Margin/Throughput relationship (Figure 24): Charlottetown is probably over-represented by retail outlets, resulting in lower than expected average outlet throughputs. Average gross product margin was consequently high, reflected in a high ex-tax pump price, although it was comparable to other markets with similar throughputs. Consolidated net revenue: No data was available for this market. It is unlikely that the removal of price regulation would result in pump prices any higher than already exist in this market. Competitive disadvantages which exist in PEI markets are shared with many other non-regulated markets which exhibit a pattern of lower prices. Therefore, there is likely no consumer benefit, and there may be some detriment attached to the PEI regulatory structure, as evidenced by its pricing history and that of Halifax. Finding 22: Some instances of direct government intervention into petroleum marketing have been shown to have a possible adverse effect on competitiveness, and likely a negative impact on consumers.

Figure 37: Charlottetown - Price History
65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jul-92 Jul-93 Jul-94 Jul-95 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96
Crude Oil Price Halifax Rack Price Canadian Average Posted Pump Price Charlottetown Posted Pump Price RUL

Charlottetown Posted Price - ex tax Canada Average - extax

MJ ERVIN & ASSOCIATES

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Part E

Findings, Conclusions & Recommendations
This Retail Petroleum Markets study meets the study objectives of: • • • • providing a sound database for policy direction; providing a means to better understand competitive opportunities and challenges; assessing the viability and competitiveness of regional markets; and determining key competitiveness factors in specific markets.

The study thus provides a tool to understand the dynamics of this vital and complex industry, and a foundation for effective policy development.

Findings
This study presented twenty-two findings which are derived from the pump price model analysis, historical evaluation of pump prices and margins, and specific market analysis: Finding 1: Refiner and Marketing Margins are a consequence of their defining prices, in turn determined by competition on a continental (Rack Price) or a local (retail pump price) scale............................................................................................. 7 Finding 2: 1996 average crude price, as a factor of the regular gasoline retail pump price, was 19.1 cents per litre, or roughly 34 percent of the pump price................... 9 Finding 3: The infrastructure of the Canadian refiner sector provides the necessary conditions required for competitive, market-driven Rack (wholesale) pricing of petroleum products................................................................................................... 11 Finding 4: In 1996, petroleum taxes accounted for 50.3 percent of the average urban price of regular gasoline in Canada................................................................ 17 Finding 5: In 1996, the average Gross Refiner Margin available to Canadian petroleum refiners to provide for all operating costs and profits on the manufacture of regular gasoline, was 5.3 cents per litre............................................................... 17 Finding 6: In 1996, the average Gross Product Margin available to Canadian petroleum marketers to provide for all operating costs and profits on the sale of regular gasoline in a typical urban market, was 3.5 cents per litre. ......................... 17 Finding 7: Price uniformity and price volatility, facilitated through street price signs, are indicators of a competitive market........................................................... 21 Finding 8: Some competitiveness inhibitors may exist in the retail gasoline market which are regulatory in nature, but exist to meet other important societal needs.... 23 Finding 9: Pump prices are established by the local dealer at over half of all retail outlets in Canada. ..................................................................................................... 28 Finding 10: Gasoline has remained at or below the “all items” Consumer Price Index nine out of the past ten years.......................................................................... 31

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......... particularly in comparisons of major urban markets to small............................ the profitability of the 481 outlets studied appears only marginal........................ 32 Finding 12: Retail pump price increases from 1994 to 1996 are wholly attributable to increases in petroleum product taxation and crude costs.... the residual represented a net loss to the supplier................... after the average 1995 consolidated revenues were distributed to meet dealer income and the supplier’s marketing overhead requirements.................. 48 Finding 19: Based on published rack prices...... reduced pump prices.... .... a feature of most market-regulated commerce............ . the average tax content of regular gasoline pump prices in major Canadian cities increased by about 5 cents per litre....... In effect... and likely a negative impact on consumers.................................................................. 35 Finding 15: Seasonal fluctuations in retail pump prices are ultimately linked to wholesale product inventory levels...................Finding 11: Retail pump price trends are principally a reflection of changes in the underlying rack (wholesale) price of petroleum products.................. 50 Finding 20: For the 481 individual outlets studied............ ................................ given the possibility of discounts from posted rack prices and potentially lower overhead costs......................................................... 37 Finding 16: Provincial differences in product taxation are a predominant cause of inter-regional pump price differences.............................. are principally a reflection of changes in the underlying price of crude oil................ which in turn. 52 Finding 22: Some instances of direct government intervention into petroleum marketing have been shown to have a possible adverse effect on competitiveness.................. The viability of the Canadian retail gasoline sector as a whole may be somewhat better.... when compared on an ex-tax basis....... 45 Finding 18: After accounting for differences in taxation and freight the remaining difference in retail pump prices between markets is very closely linked to market differences in average sales volumes such that markets with low Gross Product Margins are associated with high outlet throughput volumes......... 33 Finding 14: Canadian retail gasoline pump prices are the competitive equal to those of the US............ The study average retail gasoline outlet would have experienced a net loss without the contribution of ancillary operations....................................... petroleum sales revenues alone were insufficient to cover operating costs for the 481 outlets studied....................... 71 MJ ERVIN & ASSOCIATES 73 ............ remote population centres......... ........ residuals for outlets not studied may be better........................ Taking into account the possible discounts from posted rack prices and independent brands’ lower marketing overheads............... . these ancillary operations contributed to a lower product margin and consequently...51 Finding 21: Based on published rack prices and the individual outlet data......................... ...................... which ensures a competitive product price for buyer and seller alike............ while those with high Gross Product Margins tend to have low outlet throughputs.... while average combined Gross Refiner and Gross Marketing Margins decreased by about 7 cents per litre.... 43 Finding 17: Market-specific differences in product freight are a key factor in intermarket ex-tax pump price differences.. 33 Finding 13: From 1991 to 1996......................

the very margins within which this industry operates has. price is but one of four competitiveness “tools” available to marketers (product. Critical to the overall success of this study was the development of a model which would create a common frame of reference for the considerable terminology that accompanies an industry as complex as Canada’s petroleum sector. In comparing several diverse markets. Rack and pump prices are determined in competitive marketplaces. This has not simply been a result of a decline in underlying raw materials costs. when taxes were excluded (Finding 14). each with unique dynamics. which also serves to illustrate the interrelationships between the various stakeholders who ultimately receive the revenue from the sale of a litre of gasoline. over the long term. in comparing Canada average (city) pump prices to those of the United States. was shown to be strongly competitive: • A long-term decline in pump prices. Canadian prices have been at or below US prices in recent years. Although an objective measure of competitiveness is elusive. was observed (Finding 10). place. by all objective measures available to this study. which at times can decline to very low or MJ ERVIN & ASSOCIATES 74 .Conclusions The study findings lead to a number of conclusions relating to the competitiveness of Canada’s petroleum marketing sector. Closer examination of these strategic tools might yield additional insights into the nature of competition in this industry sector. On a national level. The contrary notion that a given refiner or marketer is free to establish a price based upon a minimum margin requirement. and promotions are the other three). As described in this study however. is mistaken. The economic relationship of the petroleum marketing sector with its related stakeholders is a complex one. exhibited a diminishing trend (Finding 13). a consistent pattern of competitiveness emerged when comparing product margins to their associated average outlet throughputs (Finding 18). The resultant margins. The study presents such a model. a variety of available data suggests that a state of vigorous competition exists in the Canadian petroleum marketing sector. 2. 1. when measured in constant and nominal dollars. The Canadian retail petroleum products industry. This price/margin model illustrates that the various sector margins are a consequence of the prices at which feedstock or wholesale product is bought and then sold (Finding 1). • • These findings are likely in sharp contrast to a common public perception of this industry in general and price trends in particular. Virtually all of the competitiveness indicators examined in this study relate to price.

well over half of all outlets in Canada operate as lessees or independents. the resultant margins were found to display a distinct relationship with average outlet throughputs for each market. MJ ERVIN & ASSOCIATES 75 . taxation as an element of public policy is an area worthy of additional research. when the “outside” factors (tax. and are a predominant cause of inter-regional pump price differences (Finding 16). particularly smaller ones. provincial. and accordingly. but also rack prices and outlet performance. refiner margins accounted for 5. This implies that the competitive dynamics pertaining to these retail markets can. rack price and freight cost. crude costs accounted for roughly 34 percent (Finding 2). While some markets. it is important to understand that. and product margins accounted for 3.5 cents. The measurement and analysis of the effect of petroleum taxation levels in Canada compared to other countries is well beyond the scope of this study. or 6 percent (Finding 6) of the 1996 average regular pump price. This study’s analysis of NRCan urban regular gasoline prices shows that the tax content in a typical consumer’s gasoline purchase is about 50 percent (Finding 4).even negative values. or even between Canadian markets with differing tax structures. demand and other competitive factors existing at the time. municipal levels of government. By contrast. Taxation is a significant factor in the price of retail gasoline. while crude oil markets are considered global in scope and rack product markets are considered regional in scope. retail petroleum markets are considered local (municipal) in scope. experienced higher than average pump prices.3 cents or 9 percent (Finding 5). A much more accurate barometer of industry competitiveness would therefore be the rack-to-retail or gross product margin. This would entail the tracking of not only pump price. The demonstrated exception to this is in markets directly adjacent to nearby US markets. taxation differences between Canadian and US markets. vary considerably from one population centre to another. but not beyond the reach of any organization wishing to truly understand petroleum competitiveness issues. generally do not serve as competitiveness inhibitors. In applying such a model to the retail petroleum marketing industry. for example) were rationalized. 3. and in some markets. Due to the localized nature of competition in the retail gasoline marketing sector. but given its magnitude. measured against the average outlet throughput for that market. and in some markets. presents a competitive disadvantage to Canadian marketers. an exercise that consumers are unlikely to engage in. Dealers were shown to have a variety of relationships with their supplier. since this is the effective range of consumer choice. the responsibility for deciding upon retail pump prices was shown to reside principally at the local dealer level (Finding 9). these markets have managed to sustain a certain level of viability and competitiveness. are thus a reflection of the state of product supply. but even in such cases. Petroleum product taxes are levied at the federal. and do. The latter two can vary considerably from one market to another.

Pump price fluctuations can be an indicator of competition in the marketplace. The pump price/margin model shows that in 1996. which in turn is the principal driver of ex-tax pump prices. Retail pump price changes showed a close relationship to underlying rack prices. in a highly distinct. it can still be concluded that the petroleum marketing sector constitutes a small portion of the total retail pump revenue distribution.Canadians nevertheless enjoy one of the lowest average gasoline taxes in the industrialized world.5 cents per litre on the sale of regular gasoline in a typical major urban market (Finding 6). which represent the majority of Canada’s population base. fluctuating prices are a strong competitiveness indicator (Finding 7). on the basis of price fluctuation alone. showed a close relationship to underlying crude prices (Finding 11). is available to provide for all retail marketing operations including outlet costs. Retail pump prices showed a corresponding seasonal pattern. While price wars are undoubtedly an indicator of competitiveness. constitute a small portion of the retail pump price. dealer income. Demand for gasoline was shown to vary significantly according to the time of year. 5. MJ ERVIN & ASSOCIATES 76 . In fact. when examined on the margin-volume model. This margin represents gross revenue (after wholesale product and freight cost) which. the absence of price war activity does not imply a lack of competitiveness. on a per litre basis. Viewed from this perspective. and more price-stable markets such as Sioux Lookout. which in turn. Sioux Lookout. 4. exhibited competitive traits typical of any of the study markets. further suggesting that a strongly competitive environment exists in the refiner sector as well (Finding 3). This consolidated outlet revenue. predictable seasonal pattern. Rack prices were shown to not significantly differ between major centres. Retail gasoline marketing revenues. the Canadian retail marketing sector realized an average gross margin of 3. and a loss in the case of urban markets. This relationship between price and demand was cited as the essence of competitiveness in the petroleum rack marketplace. While these findings are somewhat qualified in terms of this study’s use of posted rack prices as the derivation basis. when distributed these three ways (Finding 20). supplier costs and profitability. a price-stable market. incorporated with ancillary revenues and outlet costs. This study’s marginvolume model could detect no difference between price-volatile markets such as Toronto. second only to the United States. reflecting consumer demand behavior (Finding 15). translates into supplier profits of an estimated one cent per litre of petroleum sales in the case of smaller markets.

While these economics might appear to place this industry in a position of poor viability. not excessive profits. but to increases in underlying rack prices. Changing conditions in Canada’s downstream petroleum sector have caused retail pump prices to remain relatively flat since 1992. several competitive strategies.6. emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. and has been a result of. and have resulted from. if Canadian average pump prices were only one cent higher than they were in 1995. Industry profitability is extremely sensitive to very small changes in pump price. the rack price basis used in this study probably understates actual revenues by about 1 to 2 cents per litre. A truly objective barometer of downstream industry influence on retail pump price lies in the measurement of margin. have caused. both of which are beyond the direct influence of Canada’s oil companies. including: • • • improving production efficiency through refinery plant rationalizations (closures). assuming all other costs were unchanged. based upon an assumed posted rack price. Thus. improving retail outlet performance through outlet rationalizations (closures) resulting in higher unit throughputs (sales volumes). this industry sector would have realized profits of unprecedented proportions. Declining refiner and marketing margins. Both the downward trend in margins. intense competitive pressures in the downstream industry in general. MJ ERVIN & ASSOCIATES 77 . It is likely that regional and nonrefiner marketers operate with somewhat smaller overhead costs than those used in this study. pump price signs are particularly ineffective as a barometer of petroleum marketer competitiveness and profitability. these findings clearly show that pump price increases are ultimately linked not to increased profits. crude costs. 7. Indeed. profit margins in this sector can be stated to be in the order of 1 to 2 cents per litre in a “good” year. and the marketing sector in particular. the combined downstream (refiner and marketing) margin in Canada decreased by about 7 cents per litre (Finding 13). most outlets used in the 19-market study represent major integrated oil companies. despite the predisposition of many observers to use them as such. Also. not price. This trend has both resulted in. Since 1991. and the associated industry initiatives which are ongoing in nature. and in turn. Also. Nevertheless. Thus. despite increases in tax content and crude costs (Finding 12). serve as perhaps the most significant indicators of competitiveness in the downstream industry. in the long term these fluctuations are likely more reflective of market restorations. although pump prices in some markets can fluctuate by several cents per litre in the course of a week. Annual residual profits available to petroleum marketers is in the order of perhaps one cent per litre.

In suggesting this approach however. Although some smaller markets appeared to have higher gross product margins than larger markets. it would seem that if local government in smaller markets were interested in lowering pump prices. reduce pump prices. thereby improving petroleum volumes and ancillary revenues at the remaining sites. The costs of most consumer goods in smaller. other factors exist which contribute to relatively high margins and prices. MJ ERVIN & ASSOCIATES 78 . and this study showed that gasoline prices were no exception. While competitiveness in most smaller markets was shown to be as active as in larger centres. more isolated markets are generally higher than in larger centres. although this study provides comprehensive evidence of this. which should. When these margins were compared to their corresponding outlet throughputs. A wide range of petroleum gross product margins were evident within the 19market study group. had petroleum margins which were commensurate with average outlet throughput for that market. in order to generate sufficient revenue to cover the outlet’s fixed operating costs. likely due to the different geographic and lifestyle differences that exist in small communities compared to major cities. 9. Thus. virtually all of the 19 study markets exhibited similar levels of competition. That such a relationship should exist was not surprising. regardless of size. High distribution costs Smaller markets are generally further removed from their source rack point than larger centres. most markets. Low ancillary revenues Outlets in smaller centres received significantly less ancillary revenue than their group A counterparts.8. This was due to three factors: • Low average outlet throughputs The average group B outlet sold approximately 1. which could actually inhibit competition. there are three points to consider: • In very small markets.5 million fewer litres of gasoline than a group A (major centre) station. poor outlet throughputs were generally the predominant factor. according to the margin-volume model. the solution would be to encourage some dealers to exit the market. isolated markets face particular challenges: although found to be highly competitive. This created some economic pressure to sell product at a higher pump price. • • At first glance. average pump prices were relatively high. Smaller. Outlet throughput is a key determinant of inter-market pump price differences. a distinct pattern emerged: an inverse relationship between retail gross product margin and the average outlet throughput associated with that market (Finding 18). and therefore suffered an additional distribution cost disadvantage of about 2 cents per litre on average (Finding 17). reducing the number of outlets may also reduce the number of competitors. When plotted against the margin-volume model. from 3 cents per litre in Toronto to 14 cents per litre in Gaspé.

the degree of price competition in the retail petroleum has in effect. is viewed as an agency which exists to the benefit of industry and consumer alike. MJ ERVIN & ASSOCIATES 79 . The 19-market study provides some insights into the issue of whether or not regulated retail gasoline markets serve to benefit consumers (Finding 22). Some impediments to market exit may exist in the form of petroleum underground storage tank regulations which may present to the operator the option of pumping gas as the better alternative to decommissioning the site and possibly incurring prohibitive remediation costs. The loss of employment represented by a station closure may be of some concern to smaller communities. depressed petroleum revenues below that of outlet operating costs. This competition then. has seen a decline in pump prices relative to other Canadian markets. This will be driven by the depressed petroleum product margins which currently exist in the petroleum marketing sector. and likely others in Nova Scotia. is both the cause and consequence of increased activity in ancillary operations. and in turn. the Halifax market. The historical record is clear however: since deregulating pump prices. This is not to say that all direct government intervention into marketing practices is certain to produce undesirable results. is well beyond the scope of this study. Convenience store. 11. were cited as examples of ways in which outlet petroleum sales are augmented by other revenues. 10. characterized by narrow product margins and relatively flat pump prices. does not appear to benefit in consumer terms. Charlottetown. under the current PEI regulatory structure. Retail ancillary operations are a critical element of petroleum price competition. Also. Government intervention into petroleum marketing is likely a poor alternative to market-based regulation. in order to build upon the findings in this study towards a full understanding of the dynamics at work. and the traditional automotive service bay. car wash. will likely preserve a highly competitive petroleum market. and as such. as marketers find even more innovative ways to attract market share. Non-petroleum revenues at retail gasoline outlets will continue to gain prominence.• A full-serve retail gasoline outlet typically employs 3-5 staff. A full analysis of the various features of the Nova Scotia and PEI regulatory structures. As these findings show. and the perceived effect on their markets. Ancillary or non-petroleum revenue is described as an increasingly important feature of the retail gasoline marketing demography (Finding 19). many national and local environmental regulations exist for good cause. are an acceptable limitation on pure competition (Finding 8). • The particular competitiveness and viability issues facing smaller markets is an issue worthy of further study. The federal Competition Bureau for example.

This study alludes to several potential study initiatives which go well beyond the objective of public awareness and may assist both the public and private sector policy and strategic directions: MJ ERVIN & ASSOCIATES 80 . Develop cooperative industry research into marketing sector competitiveness issues. and the converse image held in much of the public domain. not inhibit. in a simple format designed for consumers and legislators. Ways in which this gap can be closed might include: • Ongoing third party evaluation of prices. possibly to the detriment of the consumer. A recurrent theme arising from this study’s conclusions is the likely gap that exists between the demonstrably high level of competition within this industry sector.This study proposes rather. Research into the specific competitiveness issues of concern to consumers would provide valuable direction for groups conducting industry competitiveness research. • • Would this enhance the competitiveness of this sector? It is felt that better public understanding of this industry’s record of competitiveness. Organizations such as the Canadian Petroleum Products Institute and the Petroleum Communication Foundation would therefore have an expanded role to play in commissioning and regularly disseminating the results of these recommended initiatives. 1. Individual companies within the retail petroleum industry have been reluctant to speak directly to the issue of gasoline pricing and competitiveness. as it does in the Canadian petroleum marketing sector. that where a healthy competitive climate exists. Improve public understanding and awareness of competition in the petroleum marketing sector. margins and competitiveness factors. Public perception measurement. and the nature of competitiveness influences. Recommendations This study advances two recommendations to enhance the existing competitiveness in Canada’s petroleum marketing sector. This study might be used as the concept basis for a comprehensive annual update of price/margin trends and selected market competitiveness research. direct regulatory interventions may have an adverse effect on competitiveness. petroleum marketing competitiveness. This should be in the form of a quarterly summary of price trends and related measurements. A regular comprehensive competitiveness evaluation. would ultimately be reflected in carefully-considered public policy which serves to truly enhance. Industry and government have an opportunity to continue to work together in cooperative research similar to that which this study represents. 2.

using Canadian and foreign selected markets. Taxation: An analysis of taxation levels on industry and consumer behavior and as a tool of policy and revenue. and issues/opportunities facing such markets. A better comprehension of the true issues and opportunities facing this industry would be an important step in the right direction towards stable and effective policy. is vital if Canadians are to put in place the structures that truly meet their social and economic needs. MJ ERVIN & ASSOCIATES 81 . by industry. Marketing Strategy Effectiveness: Research into price and non-price marketing strategies and their relative influence on consumer response. and in particular. Small Market Competitiveness: Detailed research into small market outlet economics and competitiveness. Lack of understanding of this industry can lead to misguided policies which benefit neither the industry nor the consumer. consumers.• Price/Margin Modelling: Development and adoption of a standard price model and associated terminology by industry/government. using Canadian and foreign selected markets. and regulators alike. Regulatory Intervention: Historical and theoretical research into government regulation of petroleum markets. along the lines of the model used in this study. the possible effect of underground storage tank legislation as a potential barrier to market exit and competitiveness inhibitor. • • • • * * * Better understanding of this industry. using Canadian and foreign selected markets.

Appendices MJ ERVIN & ASSOCIATES 82 .

safety and business issues. Major Oil Company . for example.Canadian Petroleum Products Institute. Integrated Oil Company .a service provided in addition to the basic retail petroleum sales operation. Ex-tax Pump Price . and therefore purchases its supply of petroleum product from an outside source.a federal tax on retail gasoline purchased by domestic (ie: motor vehicle) consumers. independent dealers. such as a retail gasoline outlet.a petroleum organization involved in both the refining and marketing of petroleum products which has marketing operations in most or all of Canada’s provinces. service bays. These product taxes include Excise tax. GST. an association of petroleum refiners and marketers. Marketer . municipal tax levees. etc. but inclusive of any corporate taxes on earnings.the segment of the oil industry involved in the refining and/or marketing of petroleum products such as gasoline. Independent Petroleum Marketer . MJ ERVIN & ASSOCIATES 83 . Grade Differential . such as a major oil company or regional refiner/marketer.a petroleum marketer which is involved in both the upstream and downstream aspects of the oil industry. and in some regions. and commission dealers. and purchases petroleum products from the same supplier for resale at a pump price determined by the lessee. lubricants.an organization who sells refined petroleum products to end-use consumers.. such as convenience goods.a petroleum marketer who is not involved in the refining of petroleum products. generally expressed in cents per litre.I Glossary of Terms Ancillary service . Downstream . etc. which serves as the voice of the petroleum products industry in Canada on environment. Margin .. car wash. Distribution Costs . Lessee .the difference in pump price between a premium or mid-grade of gasoline vs. Dealer . the regular unleaded pump price. Excise Tax . health.a particular mode of retail petroleum operation where the outlet operator (dealer) leases the retail outlet from the product supplier. Usually expressed on a per-unit basis.the retail price of gasoline that would be displayed if all product taxes were removed. in cents per litre. and included in the retail pump price. The ex-tax pump price is exclusive of these taxes. diesel. currently established at 10¢ per litre. CPPI .the difference which exists between net sales and the cost of merchandise sold and from which expenses are usually met or profit derived.(for the purpose of this study) the cost. of transporting petroleum product from the rack point to the final point of sale. There are several modes (see below) of dealer operation. such as lessees. provincial pump tax.a generic term referring to a retail outlet operator.

Supplier .the point at which title to refined product is transferred from the refiner to the supplier. Although in theory the transfer price could be set at any arbitrary value.a petroleum organization involved in both the refining and marketing of petroleum products which has marketing operations in a limited number of provinces. these can be broadly classified as company operated. manufactures (from crude oil) a range of petroleum products suitable for consumer use. and independent dealer.the wholesale price posted at the rack point. it is usually based on the market-driven rack price. Rack Price . PCF . is typically also the brand name owner of the chain of gasoline stations to which it supplies refined petroleum products.the volume (ie: in litres) of petroleum sold at a retail outlet in a given period. MJ ERVIN & ASSOCIATES 84 .an organization who. Regional Refiner/Marketer . usually per month or per year.within the context of retail gasoline marketing. lessee. Throughput . an association of upstream and downstream oil companies and related organizations. Transfer Price .Petroleum Communication Foundation. Rack Point . Upstream . the raw material from which petroleum products are manufactured. or at one on several loading terminals (usually in major population centres) where petroleum is marketed to non-refiner supplier/marketers at posted rack prices.Mode . with a non-advocacy mandate to improve public awareness of Canada’s petroleum sector.the segment of the oil industry involved in the exploration and/or production of crude oil.the type of contractual relationship between the supplier and the dealer (outlet operator). This may be at a refinery loading terminal. In the retail gasoline sector. the supplier has initial title to the petroleum product as it leaves the rack point.the internal price paid by an integrated refiner/marketer to its own refinery for refined petroleum products. Refiner . commission dealer.

7 29.1 120.3 55.3 27.1 87.9 122.9 26.3 115.1 103.8 93.4 97.8 104.II Source Data Tables Table A: CPI Index: Selected Goods and Services Year **All Items** (1) Food Shelter Natural Gas Fuel Oil Telephone Gasoline Auto Repair Alcoholic Beverages Domestic Water Domestic Electricity RUL Annual Price.1 115.6 133.0 32.2 99.5 30.1 97.0 42.3 160.2 133.2 109.0 1988 108.2 121.9 118.3 125.0 1991 126.6 107.4 136.2 50.9 97.2 49.3 151.9 108.3 1989 114.8 130. Constant dollar RUL gasoline values were derived by applying the “All Item” CPI to the nominal price for that year.2 45.2 39.2 112.4 104.4 53.7 96.5 120. No.8 135. Nominal (¢/litre) (2) RUL Ex-tax Price.8 94.2 30.2 31.6 91.8 1987 104.0 19.4 34.9 1995 133. Nominal (¢/litre) (2) RUL Annual Price.1 105.0 30.3 52.4 29.4 134.3 132.1 48.1 1990 119.0 111.0 135.7 123.5 94.8 28.4 110.3 141. 62-010: Consumer Prices and Price Indexes.5 49.1 144.6 122.2 45.7 22.6 136.5 145.1 120.1 104.3 134.1 104.4 27.8 106.1 40. 1986 Constant (¢/litre) (3) 1986 100 100 100 100 100 100 100 100 100 100 100 47.3 19.9 1993 130.9 115.7 30.4 122.2 127.7 132.3 139.5 111.0 93. using a weighted (by provincial gasoline demand) 10 city average.3 58.1 126.1 117.8 95.0 104.7 Note 1 Note 2 Note 3 Price Index data is from Statistics Canada Cat. 1986 Constant (¢/litre) (3) RUL Ex-tax Price. Nominal RUL (Regular Unleaded) price and ex-tax price is from Natural Resources Canada.2 92.4 120.9 155.1 117.2 20.1 26.4 57.6 51.8 132.8 47.5 115.5 100.3 40.7 122.9 1994 130.2 142.4 104.4 152.8 108.3 96.0 115.7 95.1 146.7 118.0 93.9 26.3 122.3 119.1 167.5 126.5 25.4 45.7 54.0 102.5 112.3 1992 128.4 124. MJ ERVIN & ASSOCIATES 85 .6 92.5 124.7 124.1 151.0 97.

3 54.2 7.8 14.4 26.2 8.0 26.5 31.0 24.9 6.6 54.0 20.9 7.1 7.7 4.1 22.1 17.2 16.8 13.1 7.5 16.9 26.3 54.4 57.2 13.4 15.8 57.7 18.8 21.7 32.2 25.1 9.5 14.9 13.1 23.4 8.5 15.7 14.3 25.9 56.4 MJ ERVIN & ASSOCIATES 86 .2 22.9 14.5 23.7 25.3 15.1 13.6 25.4 21.3 Tax Content 23.1 23.7 4.3 42.8 33.9 56.3 13.9 58.2 12.6 54.6 7.6 23.3 58.5 23.0 4.2 26.4 14.8 16.0 24.1 39.2 24.2 27.0 28.3 57.2 21.4 30.5 32.5 Gross Marketing Margin Gross Refiner Margin 53.9 23.7 14.7 23.4 13.0 12.0 24.4 34.7 4.8 25.4 33.8 14.7 7.7 Downstream Margin 14.2 41.8 21.1 24.1 5.0 33.0 15.7 31.5 7.5 23.0 24.6 8.4 14.7 63.7 34.2 27.2 23.5 11.9 53.5 8.9 30.8 23.6 26.3 13.1 18.9 31.9 6.3 24.9 17.5 35.4 26.7 29.7 29.1 21.3 4.9 7.4 20.2 14.9 54.3 14.6 20.6 52.0 25.5 25.9 7.4 7.9 6.8 8.7 12.3 54.8 24.4 26.8 55.1 13.1 16.1 18.7 24.0 26.7 15.0 13.Regular Gasoline RUL Canada Avg Jan-90 Feb-90 Mar-90 Apr-90 May-90 Jun-90 Jul-90 Aug-90 Sep-90 Oct-90 Nov-90 Dec-90 Jan-91 Feb-91 Mar-91 Apr-91 May-91 Jun-91 Jul-91 Aug-91 Sep-91 Oct-91 Nov-91 Dec-91 Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Pump ex-tax Rack Crude Price Pump 10 city Avg Edmonton 30.9 9.5 27.8 14.3 22.1 29.8 14.1 16.6 9.0 14.7 19.8 22.8 23.9 22.3 17.8 53.0 16.0 16.5 28.8 30.2 14.2 7.2 13.2 56.6 25.5 26.1 52.2 65.1 53.9 25.7 6.2 11.6 13.6 28.5 7.1 25.8 55.0 7.3 26.2 6.8 28.0 22.7 18.1 53.5 57.9 26.9 25.0 16.7 13.7 28.0 24.2 63.6 13.4 13.8 29.6 26.5 54.2 25.4 24.7 39.4 55.2 27.2 26.8 9.9 25.0 55.4 58.2 13.7 7.9 55.0 5.3 26.1 13.3 13.5 33.3 15.7 29.7 33.6 54.5 30.5 27.4 31.6 26.3 23.5 22.2 6.1 19.1 23.9 4.8 11.7 14.Table B: Key Price / Margin History .0 7.3 13.5 6.9 55.6 5.9 25.4 9.6 21.7 8.0 24.0 25.9 14.7 14.4 31.9 8.5 14.5 10.6 4.4 12.2 7.8 53.4 32.3 56.0 10.3 56.9 24.8 8.9 23.5 10.1 16.4 14.3 66.4 14.6 6.8 15.3 6.9 15.0 9.9 53.4 53.0 24.7 19.2 5.5 56.3 22.4 24.2 16.0 7.5 26.2 15.9 11.0 16.4 29.6 23.2 7.1 22.3 13.0 8.7 58.1 16.8 26.2 13.7 14.2 23.2 29.0 26.0 52.5 19.6 24.9 23.8 26.3 9.2 4.4 22.9 12.3 12.9 21.9 4.0 54.6 18.5 5.9 25.4 56.7 7.3 6.3 5.

7 13.0 29.7 24.1 16.2 49.9 9.9 29.3 26.0 26.0 14.0 14.7 7.2 14.4 21.8 28.0 11.6 16.0 28.5 7.2 25.9 19.9 29.7 14.3 27.0 27.4 15.0 5.0 9.1 51.2 20.1 10.4 28.3 26.3 26.9 6.5 3.5 5.2 12.9 Downstream Margin 12.1 11.0 52.4 26.7 3.6 4.7 25.9 17.3 26.3 25.3 54.6 15.7 7.5 13.2 25.2 26.2 11.1 Tax Content 26.6 11.9 26.5 17.0 26.3 21.2 Gross Marketing Margin 4.3 23.8 23.9 11.0 28.5 25.3 4.1 14.7 5.8 22.5 54.2 54.7 29.7 53.2 28.9 3.1 55.4 26.3 26.3 28.5 21.8 17.7 16.9 4.3 28.4 16.7 3.5 53.7 18.2 14.7 6.3 9.6 53.5 21.6 53.4 51.3 26.1 26.2 4.9 4.2 26.7 15.6 10.9 5.6 23.0 6.1 11.7 53.8 25.7 23.3 4.6 3.7 52.8 20.1 24.1 57.8 28.0 28.4 25.1 21.3 26.1 Gross Refiner Margin 7.0 25.0 28.0 57.5 11.5 14.8 52.2 20.8 50.7 14.3 58.6 4.2 7.9 12.5 15.1 61.9 14.9 49.2 9.3 4.1 15.3 26.3 6.4 32.0 53.6 12.5 6.9 23.4 26.7 24.4 5.7 26.5 6.0 54.5 7.2 5.6 20.5 19.2 7.6 15.7 12.3 21.8 49.1 26.4 21.5 20.0 5.0 28.4 6.4 6.1 20.1 11.0 25.5 3.2 4.1 3.1 6.3 7.2 14.5 11.0 6.1 source: Natural Resources Canada MJ ERVIN & ASSOCIATES 87 .4 26.4 13.1 54.8 4.4 24.9 14.5 13.5 9.5 5.0 12.1 15.0 12.0 6.6 20.3 9.5 28.6 21.6 17.2 27.6 27.6 10.RUL Canada Avg Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Jan-96 Feb-96 Mar-96 Apr-96 May-96 Jun-96 Pump ex-tax Rack Crude Price Pump 10 city Avg Edmonton 26.2 23.2 7.8 10.7 6.4 4.2 7.1 6.1 11.3 7.7 25.6 5.4 11.3 53.1 26.6 19.0 24.3 9.6 9.7 5.1 14.7 53.7 8.3 13.5 19.4 7.3 55.9 27.8 29.5 6.0 9.1 14.5 23.5 4.4 25.1 6.4 6.8 27.3 8.1 15.9 58.8 23.1 51.3 12.9 12.7 51.1 6.8 6.3 26.2 15.7 13.9 28.9 49.5 55.4 6.9 27.5 21.2 26.7 26.5 2.

Table C: Canadian Supply.113.580 3.883.625 2.294.859 2.661 Canadian Domestic Gasoline Sales (M3) 2.422.4 32.027 2.785.998.5 31.9 31.379.604 2.900.729.853 3.256 2.2 27.966.324 2.456 2.934.070 3.218.1 23.279 2.932 2. Inventory.1 21.037 2.9 30.801.733 2.019.641.473.532.047 3.235 3.269 2.180 3.346.970 3.251.291.299.3 26.669.490 3.687.377.5 27.509 3.8 29.193 3.844.232 3.979 3.637 3.887.897 3.8 23.4 31.7 29.941 2.612 3.646 2.748.7 29.181.935 3.732.254.131.295.886 3.2 21.8 21.7 24.642.441.970.709 2.199 2.298 2.287.415 2.2 27.508.716.952.609.287 2.801.967 2.254.095 2.767.322 2.045 2.958.345.245.176 2.810.7 31.3 23.773.5 19.651 2.479 2.890.142.565.3 23.1 22.333.030.969 2.469 4.366 2.644 3.897 2.831.684 2.735.437.361.622.378.960.322 2.429 2.191 2.775.4 21.389.2 23.970.4 25.767.720 3.102.1 16.2 22.331 2.122 2.9 26.8 26.202.739.6 21.299 2.714.168 2.450 2.7 34.300.839 2.744.193 3.799.703 2.141.011 2.381 2.073 2.152 2.781.297 2.6 23.804 2.270 3.335 2.8 30.7 21.1 23.151.002.130 3.544 3.7 24.667 2.416 2.015 3.893.5 25.070.218 3.3 22.045.613 3.325 2.412 2.480.476.6 26.841 2.140.2 27.672.0 24.132.133 3.301.286.521 2.904.180 2.6 24.621.281 2.7 29.501.045 2.242 2.765 3.688.437.930 3.097 2.995.600.0 28.840. Demand.101.8 23.430.796.873.802 2.2 27.202 3.458.188 3.4 29.311 3.779 2.281.081.516.973.8 27.9 23.830.176 3.2 23.853 2.823.003.968 3.5 22.693 3.9 26.462.771 3.020 2.931 3.6 28.748 2.089.2 20.263.322 3.869 2.409.254 2.485 2.4 22.5 30.808.108.112 2.051 3.246 2.566.5 32.813 2.894.4 24.647.620 3.558. and Pump/Rack Prices Net Canadian Closing Supply: Gasoline Canada Production (M3) Inventory (M3) Jan-91 Feb-91 Mar-91 Apr-91 May-91 Jun-91 Jul-91 Aug-91 Sep-91 Oct-91 Nov-91 Dec-91 Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 2.3 Canada Avg RUL Rack Price (¢/l) 35.592 2.837.933 3.427.9 19.180.026 2.636.599 2.044 2.9 23.192.025.283.510 3.262.220.457 2.329 3.201.661 Canada Avg ex tax RUL pump price (¢/l) 39.930.673 2.725.9 22.206.101 2.499 2.587.2 26.979 2.889 3.4 21.871 2.7 28.255 3.443 2.455.301 2.7 26.373.035 2.498.589 3.636.710.7 18.160 3.2 26.876.666.1 29.323 3.853.141 3.250.338 3.9 17.477.3 24.326.000 3.4 24.370 2.164.130 3.804 3.354.287 2.633.179 3.085.938.8 MJ ERVIN & ASSOCIATES 88 .1 23.2 24.709 2.161.209.439.884 2.8 22.682 3.403 2.316.5 27.976.752 2.5 28.369 2.475 2.8 33.369.5 23.9 21.461 3.3 22.878 2.677 3.671.411.141.056 3.572 2.864 2.429 2.619 2.874 3.2 29.120.798.315 2.782 3.818.0 20.114 3.039.8 28.880 Canadian Retail Gasoline Sales (M3) 2.075.626.627 2.122.268 2.029 2.321.743 2.9 23.822.047 2.833 2.083.615 2.182 3.897.285 2.9 29.654.022.095.630.827 3.628 3.301.067.633 2.502 2.843.558.518.313 2.682.564 2.865.

566 3.7 22.264 2.324.074.320 3.8 21.597 2.386 3.2 25.390.155 2.165.1 24.Net Canadian Closing Supply: Gasoline Canada Production (M3) Inventory (M3) Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 3.179.5 21.714 2.671.796.970.519.773.214 2.649.5 25.2 25.4 20.889.679.426.0 26.936 3.082.5 source: Statistics Canada (production.857.505 2.149.806.317 2.986.660 3.182.648 3.614.8 25.037 3.467 2.864 2.797.222 2.4 26.7 19.825.516 3.6 20.984 3.0 26.219 Canada Avg ex tax RUL pump price (¢/l) 27.649.717.6 20.4 25.386 3.1 21.195.703 3.382.363.244 3.344 3.261.005 2.198.480 2.785.346 2.965.7 Canada Avg RUL Rack Price (¢/l) 20.906.620.264 2.692.881.8 24.656 3.601 3.250.198 2. demand.336.9 22.617 2.170 Canadian Retail Gasoline Sales (M3) 2.539.593.555.097.521 2.5 21.324 2.315.961.048.994 3.130 3.830 3.414 3.148.644 3.904.9 27.606.977.669 2.537.675 2.442 2.928 3.0 25.799 2.068.338 2.840 2.055 2.753 3.112 3.077.415 2.4 26.198.006 3.930.638 2.997 2.370.940 2.0 25.658.483.8 20.141 2.8 28.863.999 3.184.170 3.123.791 3.2 26.294 3.871 3.376.667 Canadian Domestic Gasoline Sales (M3) 3.9 29.919 2.469.205 2. inventory) / Natural Resources Canada (price) MJ ERVIN & ASSOCIATES 89 .204.0 24.607.7 21.

4 54.1 59.8 56.8 53.9 54.2 51.8 64.4 53.5 57.7 57.5 45.2 46.3 49.9 54.1 44.8 52.7 65.4 55.9 51.3 42.9 62.7 65.5 51.8 44.5 57.8 56.4 61.2 65.8 49.2 59.2 43.1 44.5 58.6 59.3 52.Table D: Pump Price History .7 63.5 47.5 59.9 52.3 54.4 55.0 62.0 48.2 62.2 61.0 61.7 65.2 58.9 56.2 62.9 64.4 56.2 46.2 57.2 62.2 62.0 46.5 57.9 52.5 60.5 58.1 52.9 44.9 49.0 50.8 52.9 52.4 65.1 56.6 53.9 52.4 50.5 57.6 56.4 56.9 64.5 60.9 61.1 49.5 59.8 51.0 44.1 43.5 45.9 54.1 50.6 55.5 58.8 47.0 61.7 62.9 57.6 51.5 47.5 52.5 57.5 50.4 52.9 53.4 56.2 54.6 49.3 55.5 56.3 54.6 58.9 53.8 56.2 47.7 53.7 48.9 50.9 54.5 56.8 47.9 56.9 56.7 51.7 53.7 45.6 44.5 Vancouver 53.6 48.5 60.1 60.0 61.9 51.9 59.5 58.9 58.4 57.7 45.3 56.4 53.2 62.3 52.9 45.9 53.6 50.5 54.8 50.2 50.6 48.9 58.7 54.3 51.0 39.1 53.8 48.8 Thompson 59.9 56.9 52.3 48.5 57.1 52.8 56.1 49.2 51.5 56.5 53.2 Nanton Peace River Regina 49.2 51.5 59.9 56.5 53.2 55.7 54.5 58.4 52.9 62.9 57.5 57.5 58.1 41.8 45.7 53.2 62.5 57.9 53.5 56.5 51.0 62.9 55.9 54.8 53.0 57.9 61.1 55.2 62.0 Sioux Lookout 62.9 53.9 56.9 47.5 56.0 52.9 52.9 47.5 54.5 57.4 52.9 54.2 63.9 53.9 46.9 52.8 53.2 50.5 52.5 53.9 61.5 59.4 46.7 51.9 55.8 57.7 White Rock Calgary 45.5 59.5 57.3 55.6 47.5 60.5 59.5 57.5 59.5 51.4 48.5 61.9 51.7 50.9 53.4 56.9 53.6 46.8 52.9 61.0 61.6 46.5 51.7 57.4 53.8 56.4 61.8 48.5 47.5 46.9 49.5 62.2 50.Study Markets RUL Pump Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Victoria 54.0 54.4 49.4 46.6 55.9 MJ ERVIN & ASSOCIATES 90 .9 55.9 48.8 55.7 49.1 55.8 54.9 63.9 49.9 53.7 52.8 59.4 47.2 48.5 60.6 54.9 56.9 53.5 58.3 48.4 55.7 50.5 55.4 56.9 54.4 54.6 48.0 61.8 52.4 57.8 56.3 59.7 48.8 53.4 46.2 56.2 46.3 52.0 59.8 41.9 58.9 56.8 50.9 47.5 61.6 53.3 50.2 65.9 64.9 64.0 59.6 47.0 55.5 58.9 64.0 52.6 62.7 62.2 54.4 Winnipeg 49.3 52.0 61.1 50.5 58.6 47.9 56.9 56.5 60.4 59.9 58.4 55.5 58.9 54.9 44.7 44.5 57.5 55.4 55.3 52.9 59.5 51.3 62.1 53.6 54.8 57.5 57.9 56.7 46.8 59.1 49.0 61.4 58.2 54.8 52.5 59.6 50.6 58.3 61.7 65.9 61.4 61.9 58.9 53.9 51.5 58.9 61.8 48.4 52.2 62.4 63.5 58.3 50.4 54.4 56.4 52.2 62.4 58.7 54.9 55.1 55.7 65.7 52.9 47.0 58.3 49.8 48.5 49.5 59.0 62.4 55.6 52.7 51.

6 58.9 56.3 57.6 58.9 49.8 50.5 56.2 49.1 54.6 51.4 52.0 50.1 59.2 Chicoutimi Gaspé Saint John 60.3 54.5 55.7 57.5 54.8 55.9 55.9 58.5 58.8 61.4 58.0 52.6 55.2 59.8 54.3 52.9 53.2 57.2 54.1 61.6 63.2 56.6 59.2 57.3 59.8 53.1 51.2 56.2 55.9 57.0 58.6 63.9 61.2 51.6 61.4 57.2 49.6 60.5 56.5 64.9 53.4 54.5 59.2 57.1 53.7 56.3 55.5 53.1 51.4 57.3 56.7 60.5 61.5 57.7 54.9 55.9 54.1 54.0 60.0 59.1 54.6 54.6 61.9 55.4 53.3 61.9 57.2 54.5 52.2 55.7 64.0 55.0 49.0 57.6 52.6 51.7 57.5 60.4 51.7 53.7 52.5 Ottawa 58.7 54.3 49.5 51.0 59.7 44.0 56.6 49.5 57.2 49.1 52.7 54.3 60.2 52.2 55.2 60.1 52.0 47.6 54.1 52.2 57.5 67.3 56.0 48.2 61.5 48.2 54.9 56.8 52.6 58.2 59.0 55.7 51.5 54.9 54.3 55.8 54.6 54.0 54.7 58.2 49.2 56.3 49.9 54.2 58.6 50.0 55.3 55.5 51.0 60.9 60.2 Montreal 63.6 55.5 52.5 51.3 53.6 Canada Avg 55.1 54.3 59.5 56.4 54.7 53.4 53.8 50.1 Toronto 52.3 62.9 53.1 53.7 58.7 48.5 63.2 55.5 54.5 52.1 57.8 55.7 56.2 52.3 59.4 54.4 58.6 51.2 61.1 54.3 56.4 58.3 54.0 52.3 56.4 54.6 53.2 52.4 55.9 63.6 56.4 58.6 54.2 51.0 57.2 51.1 56.0 61.3 54.6 63.7 55.5 63.5 54.5 57.4 54.8 54.1 59.1 61.6 55.5 55.9 62.0 54.5 61.6 58.7 59.9 55.6 55.1 53.3 52.0 54.2 57.7 49.7 52.1 60.8 49.9 55.0 52.0 54.8 60.1 48.9 55.1 58.2 58.8 50.0 52.0 55.1 57.2 53.0 60.2 57.2 58.6 59.7 56.2 50.9 55.7 47.6 55.5 57.0 52.0 59.0 56.4 53.0 55.7 50.7 57.2 54.7 56.9 53.2 60.9 64.1 58.Study Markets (cont’d) RUL Pump SS Marie Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 52.5 57.7 48.8 57.6 52.8 55.8 60.1 51.9 56.8 Halifax Charlottetown 60.4 51.8 57.5 53.6 50.9 52.7 51.0 61.4 57.1 58.9 58.0 53.8 56.4 54.2 53.6 56.7 56.7 56.0 51.4 52.6 52.3 52.7 57.8 55.5 MJ ERVIN & ASSOCIATES 91 .3 54.6 58.5 60.8 57.9 49.8 53.3 53.2 54.8 54.5 54.3 55.7 51.4 45.9 51.4 54.9 61.2 57.1 56.6 52.8 59.2 56.3 53.9 61.1 58.6 54.5 61.1 49.9 61.0 57.3 52.6 53.4 57.Table D: Pump Price History .1 55.5 59.4 57.2 61.2 56.9 61.4 54.2 57.0 50.4 51.9 64.5 52.2 56.2 56.3 53.8 47.6 52.9 57.6 52.1 55.2 55.0 47.8 63.0 48.4 57.9 49.4 60.6 55.8 61.2 53.3 54.6 56.5 63.8 53.7 59.6 54.7 46.9 49.6 49.1 55.8 55.1 56.6 53.9 64.6 52.6 57.1 54.0 57.7 52.4 55.0 55.4 53.0 50.1 57.7 54.5 55.0 53.3 56.5 59.9 50.8 55.0 56.6 56.3 55.5 56.2 55.3 54.2 57.3 54.5 54.9 56.5 54.8 52.3 58.6 54.4 58.9 57.4 58.1 53.3 51.0 53.7 57.1 55.4 49.3 59.4 50.7 54.0 51.9 60.5 56.3 53.0 52.1 53.8 49.3 54.1 61.8 55.8 56.2 57.7 54.6 53.3 54.6 55.5 53.9 55.7 51.5 64.2 56.9 55.1 55.9 60.8 51.1 60.8 55.5 51.1 55.6 50.9 53.0 60.6 59.3 55.5 53.9 55.

2 24.3 29.6 23.5 26.6 24.6 27.1 31.1 Feb-93 29.8 Toronto extax 26.7 30.3 29.1 20.0 24.5 Jul-95 30.5 29.5 27.6 30.9 28.0 27.3 28.9 27.4 29.0 31.4 29.9 26.8 29.8 24.0 26.7 Sep-94 32.9 30.3 31.2 Nov-93 27.0 Jun-93 26.4 31.0 31.9 24.7 29.3 29.7 26.9 24.6 29.3 26.7 29.6 29.9 26.8 26.4 26.7 31.2 27.1 19.4 21.6 28.1 25.6 May-95 29.7 29.0 May-92 28.6 27.2 25.9 29.3 27.0 27.1 26.4 25.8 29.8 26.8 29.7 Mar-94 28.1 27.3 23.9 25.0 23.8 25.8 21.4 31.0 25.5 26.3 29.5 27.7 27.6 26.4 27.3 29.9 24.5 21.8 29.9 28.2 24.6 26.9 25.4 20.5 Aug-94 28.2 26.2 27.4 20.4 31.4 Jun-95 30.7 28.0 25.Table E: Ex-tax Pump Price History .9 24.1 24.8 24.8 Jan-94 25.3 28.9 Aug-93 30.6 23.9 Oct-94 32.4 30.8 27.3 24.7 28.8 26.7 28.4 27.2 Dec-94 26.2 28.3 28.6 30.5 Jul-94 29.7 28.2 Jun-94 31.3 27.0 23.6 26.8 31.3 29.8 24.7 30.2 26.3 33.8 27.1 Mar-95 29.7 Sep-95 30.2 26.4 29.1 24.7 Jan-92 31.1 30.9 31.6 26.3 24.8 27.5 27.9 25.5 24.8 26.4 28.4 31.6 25.9 29.7 26.6 27.4 MJ ERVIN & ASSOCIATES 92 .7 28.8 Feb-94 24.5 27.9 Jul-93 28.3 Dec-95 Edmonton Regina extax extax 27.3 Jan-93 30.1 Apr-94 29.6 26.3 21.6 26.3 26.7 30.1 25.3 Jul-92 31.3 May-94 28.8 23.4 20.4 31.4 31.3 26.8 27.4 Dec-92 31.7 29.5 29.5 29.4 22.2 Nov-92 31.4 Mar-92 28.8 27.9 23.6 28.4 29.1 25.Study Markets RUL Extax Victoria extax Vancouver ex Calgary extax tax 32.3 30.2 24.5 Oct-95 30.6 21.0 23.8 28.1 24.7 25.0 28.5 24.7 26.3 30.4 25.1 Apr-95 30.9 27.6 27.7 Winnipeg extax 27.2 25.0 24.1 26.4 22.3 32.1 31.4 28.3 29.3 29.4 30.0 26.3 28.1 28.7 27.3 30.5 28.5 Sep-92 29.0 25.5 Nov-95 30.6 23.9 25.6 23.0 23.2 28.9 26.2 28.8 Dec-93 26.7 Aug-92 24.9 21.6 22.4 27.7 26.9 30.7 30.6 Jun-92 32.8 24.4 24.1 23.3 29.7 24.3 30.5 Oct-92 30.3 26.4 28.4 23.9 28.2 Apr-93 28.0 32.4 27.8 25.4 29.2 24.2 32.3 23.4 23.7 28.2 29.3 26.9 27.9 20.6 22.6 25.5 27.6 Sep-93 28.7 24.0 21.4 25.8 28.1 27.9 30.8 22.6 30.6 Aug-95 30.9 23.9 26.9 28.5 21.2 26.4 29.2 29.8 25.1 22.4 30.6 29.5 29.9 25.5 25.4 30.4 22.6 24.4 27.6 29.0 24.0 22.1 22.0 May-93 29.4 31.4 23.5 24.0 26.9 21.4 25.2 Nov-94 29.3 28.0 Oct-93 28.2 22.4 25.0 Apr-92 30.0 23.1 28.4 24.9 29.1 30.8 27.5 23.3 24.3 Feb-95 26.9 24.6 26.6 Mar-93 28.5 Feb-92 28.7 30.3 29.5 29.9 27.8 28.6 26.5 23.4 29.2 28.2 23.1 25.7 Jan-95 27.0 29.

3 31.6 33.2 27.6 28.4 24.0 28.3 22.0 23.2 24.8 29.6 32.9 32.3 31.3 30.9 31.4 24.9 33.8 26.4 28.8 23.6 26.3 25.9 29.6 33.1 34.7 26.5 36.6 28.2 27.3 26.6 31.2 28.9 30.2 27.1 29.9 32.8 27.5 30.6 36.0 29.1 32.8 30.4 31.8 26.0 34.9 27.7 Quebec extax 32.2 30.8 36.6 26.8 30.3 34.9 23.3 28.1 24.8 32.7 24.3 29.7 24.0 33.9 27.8 26.9 27.8 25.2 36.8 32.0 36.7 26.0 28.9 29.9 28.7 28.2 26.4 25.7 26.6 32.8 29.3 31.3 27.6 31.3 31.9 31.7 24.8 28.2 26.1 30.6 25.5 24.6 28.2 32.7 29.2 28.3 28.2 32.6 34.1 28.8 28.0 28.8 27.8 32.3 33.3 25.6 29.4 33.0 30.5 25.6 36.0 36.6 25.2 33.7 29.6 34.2 26.2 25.5 28.9 30.1 28.2 27.8 25.1 31.2 27.7 34.1 Montreal extax 31.9 26.6 32.3 31.5 25.7 34.0 33.8 25.1 34.7 32.5 33.8 33.9 32.7 28.5 33.9 29.9 32.7 27.6 22.0 28.5 27.9 30.7 24.8 27.2 26.3 25.3 29.6 27.2 25.3 34.6 32.5 25.5 30.5 30.5 27.0 26.5 25.0 29.2 34.9 27.6 26.5 28.1 30.5 31.8 32.4 33.0 27.5 27.2 24.2 Saint John Halifax extax extax 34.9 29.0 28.2 23.9 26.7 26.4 22.7 23.6 Charlottetown extax 36.2 30.2 22.7 33.0 34.1 29.0 23.0 25.6 29.7 27.3 28.0 30.3 26.8 28.4 36.7 26.3 29.6 32.8 30.9 28.8 23.4 31.4 36.8 28.4 27.2 26.8 28.2 27.9 35.1 24.0 33.4 25.2 21.9 29.8 29.6 28.1 34.7 23.7 30.3 34.3 26.9 37.Study Markets (cont’d) RUL extax Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Ottawa extax 31.0 33.5 28.0 25.2 27.5 25.6 27.4 25.1 25.1 24.0 25.2 22.5 26.0 33.2 22.2 29.7 27.3 23.5 33.3 35.1 30.8 26.0 34.8 26.9 29.4 32.8 Canada Avg extax 29.2 27.4 32.7 22.1 23.8 28.0 26.7 MJ ERVIN & ASSOCIATES 93 .4 31.7 26.7 28.7 25.6 23.4 28.2 22.4 25.5 24.2 27.5 34.3 24.1 26.9 27.1 24.5 27.4 21.7 28.5 31.9 26.6 24.7 27.4 26.3 28.5 29.1 22.8 24.7 28.5 25.8 23.7 23.7 24.6 28.1 32.3 25.7 30.8 25.3 27.4 33.6 26.7 32.4 33.9 24.4 26.2 30.9 29.7 32.5 26.5 32.0 26.9 33.9 30.9 30.3 29.4 33.2 28.8 33.8 27.8 29.2 36.2 33.3 28.8 23.5 28.0 32.1 26.1 32.2 32.3 29.6 23.8 29.0 32.1 29.6 27.2 25.0 29.4 32.4 34.0 31.1 32.4 26.Table E: Ex-tax Pump Price History .2 25.

5 19.0 21.1 20.1 23.0 23.4 15.8 27.2 21.1 20.4 21.1 23.0 23.8 21.7 22.6 20.5 20.2 21.3 21.2 20.5 17.9 18.1 21.1 24.1 20.4 21.2 18.6 25.0 23.3 24.6 20.8 18.1 21.5 22.1 15.7 22.5 20.4 22.7 21.2 16.1 18.4 22.5 24.8 18.3 20.1 20.6 19.7 19.8 23.0 20.4 22.7 21.2 21.6 19.8 19.8 20.6 25.2 22.4 20.5 21.9 22.2 17.3 23.6 23.2 29.9 23.8 Ottawa rack Thunder Bay rack 20.1 20.5 23.9 21.2 21.6 18.3 18.6 20.3 23.1 21.4 22.4 21.8 18.5 22.1 16.8 22.6 23.2 23.7 22.6 20.3 23.5 17.5 21.0 20.6 19.4 22.8 21.0 22.7 21.2 18.4 21.9 21.1 15.8 23.3 26.7 22.Study Markets RUL Rack Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Saint John NB rack 21.4 21.5 23.7 MJ ERVIN & ASSOCIATES 94 .3 24.0 24.9 23.7 18.9 20.7 22.9 25.8 18.6 19.0 22.7 16.5 21.6 23.4 21.1 22.5 17.7 21.3 17.6 20.4 23.2 20.7 21.9 22.8 22.4 20.7 17.2 18.0 21.3 21.7 22.4 22.7 19.0 23.8 20.5 19.4 20.7 17.8 21.7 22.3 20.5 18.3 19.2 20.3 19.9 24.4 18.8 20.8 19.0 22.0 23.1 22.9 21.2 22.7 21.5 18.8 20.3 20.0 22.1 21.9 18.6 23.1 22.4 21.4 21.8 21.4 20.8 19.3 23.9 19.0 19.6 20.6 19.8 22.5 22.2 Quebec city Montreal rack Toronto rack rack 19.6 25.4 21.Table F: Rack Prices .4 22.0 23.6 21.7 23.3 22.5 21.0 22.0 21.7 23.2 23.3 20.3 22.7 17.5 21.1 20.8 20.1 23.7 20.2 20.5 23.2 23.3 17.1 22.0 21.4 19.2 22.4 21.0 23.8 23.9 21.6 22.7 20.1 21.9 21.3 17.8 21.3 22.8 23.2 19.5 24.2 21.5 22.2 18.5 20.1 20.8 19.2 21.1 19.9 20.1 21.7 20.0 23.6 20.2 21.2 23.1 22.5 22.8 24.9 22.4 21.3 18.8 23.6 23.1 21.5 21.1 Halifax rack 20.4 22.4 22.4 17.5 21.8 23.6 21.4 21.3 23.8 21.9 18.3 19.3 21.0 19.2 18.3 19.9 22.9 22.8 23.1 22.4 20.9 22.1 22.4 21.7 21.4 23.6 19.4 22.3 21.8 20.6 23.2 16.2 21.4 23.3 21.9 17.2 19.5 26.1 19.4 22.5 24.3 22.0 22.4 24.7 22.1 20.4 23.9 21.3 23.1 21.8 22.5 22.0 21.7 22.9 20.3 23.8 25.2 16.7 18.2 20.2 20.0 21.5 27.9 22.5 20.9 18.3 18.8 22.2 19.1 19.5 21.0 19.0 21.

9 23.1 16.0 21.7 22.2 24.0 22.9 24.7 21.2 23.2 23.3 20.0 22.9 22.6 21.2 22.5 19.9 18.5 18.4 21.7 21.0 21.0 20.7 21.7 21.9 23.5 23.8 23.7 23.2 Edmonton Rack 23.7 22.2 22.3 23.5 24.5 21.6 21.5 24.1 20.7 18.5 24.2 23.1 23.2 24.8 21.7 22.9 22.4 24.1 22.4 24.2 20.8 20.0 22.3 24.5 22.0 17.1 17.9 23.4 21.9 22.7 21.1 22.0 17.0 23.9 21.8 24.6 23.8 20.9 19.6 23.5 18.1 23.6 21.8 23.6 24.5 23.9 21.3 23.0 18.3 23.4 22.6 21.7 23.6 20.4 22.0 24.2 24.Study Markets (cont’d) RUL Rack Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Winnipeg Regina rack Calgary rack rack 24.7 23.1 21.0 23.1 21.9 21.1 23.1 21.6 21.8 22.1 25.3 24.8 22.2 21.8 20.9 19.4 23.5 23.8 22.8 22.1 22.1 22.3 22.8 Vancouver Victoria rack rack 24.4 21.4 21.3 22.6 17.3 19.1 23.0 20.2 19.4 21.7 21.5 20.5 21.5 21.7 22.8 21.9 20.2 22.2 22.8 21.6 19.3 20.2 19.7 24.6 21.1 21.2 21.6 19.9 22.4 21.0 23.4 22.4 19.4 22.6 25.9 23.Table F: Rack Prices .4 21.7 20.1 23.4 23.6 20.6 23.5 21.6 17.6 25.9 23.2 23.9 19.2 18.8 22.8 18.9 20.4 20.9 22.5 21.9 22.5 20.3 19.0 24.3 18.0 22.2 22.1 25.0 20.8 19.7 17.5 21.3 23.9 21.7 21.6 21.0 22.3 22.3 21.7 22.6 21.4 20.6 21.6 25.9 19.7 22.5 20.0 22.9 21.6 23.2 23.8 20.1 20.1 20.2 22.9 18.9 22.1 21.3 20.3 22.3 20.6 22.7 23.3 24.9 21.5 22.3 17.2 20.1 23.5 24.7 25.5 23.6 22.6 24.4 24.1 25.0 18.2 22.7 25.3 21.0 23.0 20.4 18.1 22.2 20.4 23.9 22.5 19.0 21.2 22.9 21.6 23.2 24.0 21.8 23.3 24.1 23.5 23.4 25.9 20.8 24.9 17.3 23.7 17.3 21.1 16.0 24.9 23.5 22.8 25.3 17.1 22.5 MJ ERVIN & ASSOCIATES 95 .9 24.5 19.7 21.5 22.7 21.7 19.2 21.6 20.7 21.5 21.6 20.5 23.5 19.6 22.7 23.5 21.7 22.9 24.0 21.4 22.4 21.6 22.0 23.7 24.8 23.7 21.5 23.9 21.9 21.7 22.5 Canada avg rack 22.5 21.7 22.1 21.2 21.4 19.2 23.2 24.5 22.9 19.4 23.5 20.9 22.5 21.0 22.9 19.5 22.3 21.7 24.8 24.6 21.2 20.1 24.2 20.1 23.0 24.1 18.1 18.6 23.0 25.6 23.1 21.1 23.8 21.1 19.1 21.8 22.1 23.4 24.6 23.3 23.5 17.7 22.9 19.1 19.3 17.0 22.3 23.8 20.7 21.2 21.

712 1.23 53.220 389.949 1.557. Urban.056.94 55.483 63.45 53.810.98 59.80 64.88 54.014 3.174.671 399.250 748.40 63.74 57.238 2.72 63.834 71.412 722.508 2.686 273.933 25.35 73.16 59.300 578.614 3.749 91.687 1.983 1.234 799.030.150 48.50 56.53 61.554 2.30 66.38 56.214 248.90 67.058 2.475 1.749 243.060.00 48.858.327 Average Pump Price (¢/litre) Premium Midgrade Regular Diesel 63.00 57.296 179.20 54.000 1.50 55.621 102.246 2. and All Study Markets are weighted (by market population) averages.905 183.000 63.249.101 256.55 58.093.192 2.894 1.985 636.60 49.890 2.02 51.850 126.28 65.20 58.20 59.298 576.669 203.26 49.796 2.420.000 217.10 52.018 2.30 68.60 60.40 61.50 56.65 54.120 570.30 63.89 65.70 49.60 70.597 2.Throughput and Price by Grade 1995 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Group B All Study Mkts Average Throughput (Litres) Premium Midgrade Regular 661.460 833.26 44.678.945.971 473.483 2.009 54.543 2.03 58.60 50.11 58.811 120.18 51.10 59.85 48.830 2.102 98.113 2.173 568.704.30 54.334.895 600.36 54.40 58.018.643 184.400 142.790 185.40 54.414 450.636.196 669.53 48.101 447.90 62.903 33.241 451.72 74.268 478.30 57.438 591.87 61.20 60.628 702.32 51.78 67.702.34 63.377 30.30 52.859 240.529 123.70 55.40 59.702 333.85 54.00 57.211 15.332 101.19 49.837 329.97 63.625 64.10 63.204.23 63.997 397.25 57.00 66.19 52.89 60.770 2.745.935 758.45 63.97 51.30 54.93 63.141.698 Note: Regional.86 56.620.166 102.00 62.513 19.897 350.370 41.24 61.972 429.26 63.00 67.194.000 1.Table G: Study Market Data .448.83 68.832 91.980 120.92 51.90 63.119 632.42 53.245 351.10 53. MJ ERVIN & ASSOCIATES 96 .88 64.07 61.145.22 59.20 61.516.17 Diesel 64.500 378.72 58.796 529.13 58.48 56.052 84.922 103.89 61.73 65.153 316.66 50.549 111.

92 30.31 22.93 23.33 21.06 28.83 22.45 20.03 24.89 25.68 Diesel 36.13 23.34 25.07 24.96 24. and All Study Markets are weighted (by market population) averages.82 28.36 26.27 29.50 25.55 28.43 21.33 21.39 22.16 22.89 29.02 23.23 24.92 21.07 24.45 28.33 27.96 24.25 31.81 25.51 25.76 24.97 22.95 Premium 26.15 27.96 22.49 21.34 20.33 22.23 23.63 24.69 23.Table H: Study Market Data .34 26.88 22.90 27.76 25.59 22.23 26. Tax (by Grade) Rack Pt.15 29.75 27.33 21.65 27.38 24.15 24.39 Note: Regional.89 28. Urban.83 24.51 25.25 24.40 25.88 28.42 24.88 22.99 26.32 33.33 21.47 27.16 29.09 27.26 27.48 25.45 25.63 20.36 24.65 21.26 28.57 22.38 24.91 21.64 28.51 20.09 24.01 22.42 24.59 28.16 21.45 23.08 25.35 25.73 32.33 22.41 22.41 27.50 20.18 28.27 20. Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Group B All Study Mkts Victoria Vancouver Vancouver Calgary Regina Winnipeg Calgary Edmonton Winnipeg Toronto Ottawa Toronto Winnipeg Montreal Quebec Montreal Saint John Halifax Halifax 1995 Average Rack Price (¢/litre) Premium Midgrade Regular Diesel 26.59 22.95 25.39 21.43 28.39 21.99 28.28 22.84 28.97 25.49 21.58 25.81 21.85 28.20 20.83 24.45 29.88 20.93 23.95 22.20 27.37 27.01 28.45 20.32 21.40 27.75 22.89 26.45 24.78 Product taxes Midgrade Regular 26.21 27.45 22.45 20.17 20.59 28.47 28.08 23.82 21.65 26.03 20. MJ ERVIN & ASSOCIATES 97 .83 23.95 22.43 21.07 26.54 28.47 20.59 28.Rack Price.07 26.83 24.45 20.59 24.43 20.92 20.63 28.97 23.81 27.63 26.49 31.51 31.49 25.18 25.43 20.42 25.88 20.53 23.25 28.11 26.39 22.45 29.98 28.74 21.87 26.81 28.04 26.25 27.45 24.88 28.92 22.84 28.73 26.83 25.98 25.03 21.23 25.90 26.33 21.33 22.15 20.28 23.93 27.04 24.21 27.55 28.42 27.69 27.63 21.07 24.56 22.94 23.30 29.57 29.63 25.

57 12.51 11.59 4.06 28.04 0.63 58.89 21.16 3.68 7.83 36.24 23.33 9.41 12.26 27. MJ ERVIN & ASSOCIATES 98 .81 28.02 3.37 26.83 27.80 9.18 21.47 0.27 60.72 26.43 0.44 56.28 1.08 0.73 2.49 2.58 1.13 0.14 7.97 0.68 2.62 56.28 27.04 22.19 5.83 1.28 56.34 0.64 2.22 5.20 5.77 30.31 34.58 66.30 5.45 1.35 27.45 6.48 7.73 1.03 7.85 24.54 50.08 17.88 5.22 14.00 4.60 14.03 28.63 60.38 22.53 6.75 23.08 55.06 5.28 1.23 38.91 0.17 11.17 1.47 58.21 8.21 24.86 28.17 26.38 7.56 4.23 7.18 7.60 7.13 11.94 22.04 23.96 3.77 5.84 5.(∑x)2 ]/n2.43 23.36 20.70 22.35 28.29 24.66 28.033 0.26 5.99 0.96 28.85 21.24 7.99 2.83 21.27 6.88 31.53 22.93 56.94 Note: Regional.98 0.39 56.71 33.89 0.01 31.04 28.13 28.90 23. Margin Cents per Litre 95 Blended Pump Price 95 Blended tax 95 Blended Extax Price 95 Blended Rack Price 95 Retail Freight Cost Gross Marketing Margin 6.00 58.81 26.20 14.24 7.96 27.52 5.34 1.82 95 Retail Gross Product Margin 6.41 7.85 26.27 11.15 66. Costs.41 29.29 8.38 28.38 0.Blended Prices.29 7.50 10.78 2.60 23.30 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Variance Avg Deviation Group B Variance Avg Deviation All Study Mkts Variance Avg Deviation 57.82 32.96 25.02 13.44 25.33 .52 30. Urban.17 9.11 26.75 28.42 2.50 3.64 3.10 6.35 60.00 0.31 0.79 33.98 31.90 59.79 0.93 22.53 21.77 37.94 17.91 2.83 12.35 58.Table J: Study Market Data .38 2.80 1.44 33.16 20.91 22.64 3.95 21.14 60.85 11.32 31.21 8.36 0.07 0.25 1.07 30.06 0.26 3.16 54.68 7.49 57.86 49.01 0.56 24.05 6.64 1.84 28.18 55.27 62.76 5.12 6.07 0.92 22.31 23.31 28.22 1.00 22.30 12.50 58.02 0.95 6.89 28.02 22.82 3. Variance uses the formula [n∑x2 .98 0.11 31.73 22.50 0. Average Deviation is the average deviation of the market values from their mean (average) value.08 3.10 3.98 1.73 10. and All Study Markets are weighted (by market population) averages.91 29.12 23.

623 2.272 $ 210.526 $ 207. but for ancillary revenue.544 $ 175.934 3.746 $ (374.750 $ 271. Income Average Outlet Sales (litres) Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Group B All Study Mkts 3.885.004.102 $ 223.855 $ 278.071. and All Study Markets are weighted (by market population) averages. MJ ERVIN & ASSOCIATES 99 .023 $ (15.Sales.098.467 $ 96.010 1.875 $ 255.074 $ 131.550 694.478 4. these averages are based on all applicable study markets.871) $ (128.890.250.502 $ (80) $ 60.648 3.209 $ 26.800 $ 225.900 $ 179.135 $ 199.794 3.144 2.244 95 net retail Ancillary Revenue petroleum revenue $ 208.995 $ 234.081 $ 222.966 3.716 Note: Regional.013 $ 227.000 2.520 5.367) $ (164.564 $ 252.143) $ (249.120 $ 54.632 $ 256.295 $ 174.223.852) $ 119.116 Outlet costs 95 Consolidated Retail Outlet Income $ 126.766) $ (274.572) $ (286.856 3.032 $ 77. Outlet Costs.429 $ 238.272 $ 118.772.058.247 4.224 $ 189. Urban.542 $ 222.241) $ (227.956) $ 200.805.246 $ 118.913 $ 139.866) $ (244.911) $ (166. outlet costs.779 $ 121.707 $ 260.014.993 $ 113.068 3.626 $ 81. Revenue.098 $ (320.638 2.604.095.209 $ 82.208) $ (226.000 $ 156.688 $ 85.677 $ 180.217 2.394.948 3.265.481 $ 96. For 95 net retail petroleum revenue.263 $ 60.510 $ 60.289 981.780 $ 85.646) $ (98.066 3.302 $ 69.827.332) $ (238.622 $ 174.900 2.000) $ (241.640 4.011.557) $ 102. and consolidated outlet income these averages are based only on those markets with available data.630 3.067 $ 92.117 $ 207.Table K: Study Market Data .837 $ 56.197.157.658.719 3.279 $ 154.465.694 3.542.550 $ 177.375) $ (49.089.129 $ 97.

MJ ERVIN & ASSOCIATES 100 .88 12 7.24 0.20 17 14.08 3.071 2.40 1 3.91 12.30 0.845 15.465 694 3.22 3.394 2.02 0. N refers to study sample size (total = 481).975 2.17 rank* 7 9 9 6 8 11 3 16 17 1 4 12 18 2 15 19 13 5 14 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown Gross Product Margin ¢/l rank* 6. 12 18 4 27 15 17 4 6 5 30 19 10 3 32 14 6 9 9 5 Freight ¢/l 0.550 1.73 5 10.Demographic Profiles Population pop’n 299 .51 9 11.60 3.095 3.73 14.50 3 10.585 6.89 7.79 6.775.89 2 4.90 13 4.76 18 5.50 8.223 3.98 7.06 1 5.000 pop’n No.21 0.95 3 9.775 678.395 rank 8 3 14 4 9 6 19 17 16 1 5 11 18 2 10 13 12 7 15 No.53 10 6.745 16.80 10 4.22 0.47 14 3.98 6.20 0.40 9 4.23 6 7.265 2.315 710.60 11 7.827 3.36 5.00 11.06 5.45 0.27 0.08 16 3.97 8.96 5.715 14.45 14.23 8 31.275.42 5 14. 106 446 8 313 86 261 5 8 6 546 209 24 3 866 97 8 56 113 23 rank 8 3 14 4 10 5 18 14 17 2 6 12 19 1 9 14 11 7 13 No.55 19 11.88 11 8.28 17.605 16.41 1. rank* 3.098 4.10 3.01 7 2.43 12.38 0.03 14 N= 26 37 5 69 30 61 2 4 4 59 39 12 2 74 16 2 17 18 4 Note: Where an * appears after “rank”.52 13 5.30 1.604 3.Table L: Study Market Data .014 5.310 1.94 18 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown Avg Volume per Outlet Marketing Margin 000's litres 3.542.475 3.145 81.870 120.33 0.675 179.970 330.29 1.50 9.13 2 11.089 3.058 1.06 16 4.85 15 11.658 3.47 7.180 616.29 8 7.890 rank 9 4 5 3 10 8 15 13 16 1 2 6 19 7 12 18 14 11 17 ¢/l 6.08 4 2.04 15 4.790 1.91 17 4.27 1.157 2.41 0. of Outlets No.54 6 2.48 7 7. of Brands No.14 rank* 10 9 12 3 1 2 10 16 17 7 6 15 18 7 13 19 4 4 14 rank 9 5 17 3 7 6 17 13 15 2 4 10 19 1 8 13 11 11 15 Est Outlets / 10.68 4 7.004 3.84 12 5. inverse ranking is used (lowest value = 1).17 19 9.250 981 2.400 74.

bulk. health. Senior Advisor. Vice President Public Affairs Address: 275 Slater Street. K1P 5H9 Phone (613) 232-3709 Fax: (613) 236-4280 Industry Canada Industry Canada is the primary overseer of the Sector Competitiveness Framework (SCF). Ottawa ON. K1A 0H5 Phone (613) 941-6219 Fax: (613) 941-2463 MJ Ervin & Associates / Q1 Solutions Inc. 119 . Principal Address: #400. Contact: Maureen Monaghan Address: 580 Booth Street. Contact: Cindy Christopher.14th Street NW Calgary AB. K1A 0E4 Phone: (613) 992-1477 Fax: (613) 992-0614 MJ ERVIN & ASSOCIATES 101 . Ottawa ON. a series of studies whose goal is to strengthen Canada’s competitiveness. Contact: Michael J. and provide background resources to industry public affairs managers and the media. generate jobs and growth. Ervin.com Natural Resources Canada Natural Resources Canada is a key information resource on the matter of petroleum prices. Ottawa ON. Petroleum Products Address: 235 Queen Street. accessible through a public fax-back dial-in system. safety and business issues. and in doing so. Contact: Brendan Hawley.III Sources of Information about the Downstream Petroleum Industry Canadian Petroleum Products Institute (CPPI) The CPPI is a national association of petroleum refining and marketing companies which serves as the voice of the petroleum products industry in Canada on environment. aviation and lubricants marketing channels. They work with major oil companies in benchmarking performance in the retail. cardlock. T2N 1Z6 Phone: (403) 283-8704Fax: (403) 283-9104e-mail: mervin@cadvision. They maintain a large database of historical prices at most major centres. The SCF is the basis for this study. MJ Ervin & Associates is a Calgary-based consulting organization specializing in the downstream petroleum industry.

non-advocacy organization whose mandate is to increase public awareness of Canada’s oil industry.ab. It reports industry marketing trends and compiles an annual survey of retail and wholesale outlet representation. Contact: Gerard O’Connor.ca Statistics Canada Statistics Canada publishes a variety of petroleum industry performance figures. Contact: Len Bradley.6th Avenue. SW Calgary. Supervisor.T2P 3P4 Phone: (403) 266-8700 Fax: (403) 266-6634 Petroleum Communication Foundation (PCF) The PCF is an industry funded. Executive Director Address: 214. Ottawa ON. 311 . ABT2P 3H2 Phone: (403) 264-6064Fax: (403) 237-6286e-mail: pcomm@pcf. Calgary AB.6th Ave. Its monthly publication “Refined Petroleum Products” (cat. The PCF is a useful resource for any person or organization wishing to become better informed on general downstream infrastructure and retail gasoline price/competition mechanisms. 101 . Energy Section Address: Statistics Canada. Octane is published quarterly. no 45-004) is a useful source of supply and demand volume data. and is a useful “window” on this industry. Contact: Robert Curran.Octane Magazine Octane is Canada’s refining and marketing trade journal. Managing Editor Address: Suite 2450. K1A 0T6 Phone: (613) 951-3562 MJ ERVIN & ASSOCIATES 102 .